Welcome, interest rate relief for consumers

Subdued economic growth, low inflation, and weaker consumer and business confidence made a compelling case for additional interest rate relief, which was evident at this month’s (May) MPC meeting, states Dr Andrew Golding, chief executive of the Pam Golding Property group.

The 25 bps reduction results in the SA Reserve Bank repo rate being lowered to 7.25%, which means the prime lending rate drops to 10.75%. 

Encouragingly, with inflation remaining below 3% (2.85% in April), the Monetary Policy Committee took the chance to provide South Africa’s economy with a much-needed boost in sentiment.
Furthermore, with inflation surprisingly lower in recent months and a petrol price cut likely next month (June) – although partially offset by a 15 cents per litre increase in the fuel levy – price pressures are expected to remain subdued. The consumer inflation rate is currently well anchored below the lower limit of the 3%-6% inflation target.

Furthermore, local economic recovery has been sluggish in the first quarter of the year, with GDP growth forecasts being downgraded to approximately 1.5% for 2025. Additionally, consumer confidence has trended downwards, partly due to the proposed 2% VAT hike and the overall increase in the tax burden in the 05/06 Budget.  

Meanwhile, the increase in the fuel levy, rather than a VAT rise, is likely to put additional strain on already constrained household finances. In addition to providing some debt relief for consumers generally, a reduction in the interest rate serves as a positive indicator for sentiment in the housing market, offering encouragement for those with existing mortgages or looking for credit to purchase their first home. According to ooba Home Loans, the recovery in first-time buyer demand has stabilised at around 46.5% of applications as consumer confidence has weakened amidst a higher tax burden – with no allowance made in the Budget for tax bracket creep to accommodate inflation.

Fortunately, South Africa’s housing market is currently underpinned by a growing demographic of young, aspirational home buyers and renters. This creates a positive ripple effect in demand across all sectors of the market. Additionally, market activity is stimulated by movements between provinces and properties changing hands due to lifestyle circumstances. In the luxury market, iconic, high-end properties continue to be in demand in sought-after locations. A testament to ongoing activity in this luxury sector is Pam Golding Properties’ recent sale of two adjacent erven on prime Nettleton Road in Clifton on the Cape’s Atlantic Seaboard for R170 million.

Analysts advocating for a rate cut before the MPC’s decision observed that at least 15 major central banks have lowered interest rates since early April, when the US administration instigated a wave of turmoil with punitive tariff hikes that were subsequently temporarily paused.

Given the weak state of the local economy and the benign inflation rate, the Reserve Bank seems to have followed the lead of these banks. 

Among the numerous global trends, declining oil prices and a prolonged weakening of the US dollar against a range of its peers could signify a more favourable inflation outlook in South Africa – allowing for further interest rate relief.

That said, the Bureau for Economic Research (BER) notes that it is only a matter of time before the Reserve Bank introduces a lower inflation target, which will also dissuade further interest rate cuts as the Bank seeks to anchor inflation expectations around the new, lower target. Given that additional rate relief was postponed earlier this year due to global developments, the Reserve Bank may now opt to pause in order to implement the lower inflation target – a move most agree will help further diminish the inflation rate and ultimately create room for additional rate cuts in the future.