By Nkosana Khumalo
On Thursday, 19 September 2024, the South African Reserve Bank (SARB) made a significant move by cutting the repo rate by 25 basis points, bringing it down to 8%. This marks the first rate reduction since 2020, offering some much-needed relief to the country’s economy, which has been grappling with high interest rates over the last four years. The repo rate had previously been held at 8.25% since May 2024, and this new cut is expected to have a ripple effect on borrowing costs for consumers and businesses alike.
A Response to Easing Global Inflation
The SARB’s decision comes in the wake of global central banks initiating similar rate cuts, including the U.S. Federal Reserve and the European Central Bank. Governor Lesetja Kganyago emphasized that while global inflation is slowing, the SARB remains cautious, especially given the volatile geopolitical landscape. South Africa’s inflation dropped to 4.4% in August, comfortably within the bank’s target range of 3% to 6%. The SARB expects inflation to remain below the midpoint of its target range through 2026, supported by lower oil prices and a relatively stronger rand, which has appreciated against the dollar in recent months.
The repo rate cut was widely anticipated by economists, who predicted that the Reserve Bank would follow the U.S. Federal Reserve’s lead in reducing interest rates to boost economic growth and counter the high cost of living for South Africans. Many experts had forecasted this move as a sign that the SARB was aligning itself with global trends of monetary policy easing .
Impacts on South African Consumers and Businesses
The reduction of the repo rate to 8% will lower borrowing costs, benefiting households with home loans and vehicle finance, as well as businesses reliant on loans for their operations. This move is seen as a way to stimulate consumer spending and business investment. Over the past year, consumers have struggled under the weight of high interest rates, with many facing increased costs for credit and loans.
The prime lending rate, which commercial banks use as a benchmark to set interest rates on loans, has also been reduced, now standing at 11.5%. This shift is expected to provide much-needed financial relief to indebted South Africans, allowing them to better manage their debt repayments and potentially leading to increased consumer spending in the latter part of the year.
Economic Growth Outlook
In addition to addressing inflation, the SARB’s decision is intended to stimulate economic growth in South Africa. The country’s economic growth has been slow, with the first half of 2024 performing below expectations. However, the second half of the year is expected to see improvements, bolstered by more stable electricity supply from Eskom and higher consumer spending linked to recent pension reform measures.
The SARB forecasts a modest GDP growth rate of 0.6% for the final two quarters of 2024. This growth projection is tied to improved electricity generation, the stabilization of key industries, and the implementation of economic reforms. Despite these positive signs, South Africa’s overall growth remains below historical averages, and concerns remain about the pace of recovery in investment .
The Future of South Africa’s Monetary Policy
While the rate cut offers immediate relief, SARB has indicated that further rate cuts may not be forthcoming in the short term. The bank remains cautious about the global economic environment and the potential for inflationary shocks. Factors such as geopolitical tensions, supply chain disruptions, and fluctuating commodity prices could affect future monetary policy decisions.
Nonetheless, the SARB is optimistic that inflation will remain contained and that South Africa’s economic growth will gradually improve over the coming years. For now, the 25-basis-point cut is a welcome development for a country that has been navigating challenging economic conditions, providing a glimmer of hope for consumers and businesses alike
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