What is affecting interest rates in South Africa

Consumers and homeowners are anxiously awaiting an interest rate cut. The repo rate is 8.25%, and the prime interest rate 11.75%. It has remained unchanged at a 15-year high since mid-2023.

Samuel Seeff, chairperson of the Seeff Property Group, says the interest rate has been too high for too long, and has had a dampening effect on the economy and property market. Disappointingly, Reserve Bank Governor, Lesetja Kganyago recently signalled that the rate cutting cycle will be delayed given that inflation appears to remain stubbornly high.

The news that inflation has dropped to 5.3% (from 5.6% in February), however, brings renewed hope that the rate cutting cycle may still take effect soon. Seeff says the high interest rate has had a dampening effect on the property market, especially in the mid-market and lower price bands.

The prime interest rate is about 1.75% higher compared to the start of 2020 before the onset of the Covid-pandemic. This is impacting affordability for property buyers who are also hit by higher living costs and slow wage growth. Deeds Office transaction volumes for 2023 compared to 2022 are down by about 20%, and the overall Rand-value IS down by about 14%.

It is also not just South Africa which is grappling with a higher than usual interest rate. Prime markets such as the UK, Euro, and USA are all battling with higher interest rates due to geo-political impacts. Contrary to expectation, the US Fed recently signalled that they too are not yet ready to cut interest rates.

What is affecting interest rates in South Africa?

We usually talk of two interest rates, being the repo rate and prime rate. The South African Reserve Bank (SARB) determines the interest rate by setting the repo rate which is the rate at which it lends money to South African banks.

The banks in turn lend money to consumers at the prime interest rate, often at an additional premium depending on the type of lending and risk. Long-term debt such as home loans usually carry a slightly lower premium compared to short-term debt such as overdrafts, credit cards, retail accounts and so on.

The lowest interest rate level over the last 30-years was 7% in July 2020 during the Covid-pandemic. It stayed at that level for 14-months before it started increasing again. The low interest rate boosted property sales to the highest levels since 2007/8 in terms of volume and prices. The interest rate spiked to 24.5% in late 1998 and averaged around 12% in the 2000s.

According to the Reserve Bank, its mandate is “to protect the value of the Rand in the interest of balanced and sustainable economic growth.” It uses the interest rate to influence the level of inflation. The Bank’s inflation target range is 3%-6%, and the higher the inflation, the higher the interest rate is likely to stay.

The repo rate is set by the Monetary Policy Committee of the Reserve Bank which meets every second month to assess various factors and then decide whether there will be an increase, reduction, or whether the rate will stay the same. The Bank can, however, step in at any time with an interest rate adjustment as was the case during the Covid-pandemic.

Once any interest rate adjustment is announced by the Reserve Bank, the various banks and financial institutions will then adjust their prime rate accordingly and advise their customers of how this will affect their debt repayments.

The current challenge for interest rates is that after moderating to 4.7% in mid-2023 (which is within the target range), inflation since ticked monthly to 5.6% in February which is close to the upper target range of the Bank. It is a relief that it again declined to 5.3% in March.

The high inflation rate presents a real challenge to the Bank in a climate where the economy is just not growing, and a rate cut is highly desired and anticipated. The concern, says Seeff, is that the higher rate has done more harm than good, and given the stalled economy, we believe it is a missed opportunity not to cut the rate as an economic boost.

While we wait for the next interest rate announcement towards the end of May, Seeff says the property market continues to tick over in the normal course of business. It is still largely favouring buyers with good value to be had and many willing sellers. An interest rate cut will no doubt be a strong boost for the next uptick in the market.

Writer: Gina Meintjes