Following the interest rate cut to 6.50%, Momentum Investment Economist, Sanisha Packirisamy says that consumers will benefit but it is not nearly enough.
The rate cut which is the first since July, has resulted in the prime lending rate being reduced to 10%. The decision to cut the interest rate comes after the rand reacted positively to domestic political developments.
Cost of borrowing
Packirisamy says that interest rate cuts lower the cost of borrowing for indebted consumers. This is especially true for those consumers who have debt associated with flexible rates.However, consumers who have borrowed fixed-rate loans (often unsecured loans) are unlikely to benefit from the same degree, she adds.
Chief Economist at Investec, Annabel Bishop agrees with this and says that such a small rate cut is unlikely to add much to spend for many. Bishop says that while the cut is too small to have meaningful impact, it may provide some boost to confidence.
Notably, the interest rate cut adds positive sentiment to the property market. “A cut in interest rates lowers the cost of mortgages”, says Packirisamy. This essentially makes it more affordable for consumers to leverage their property. Packirisamy says that this positive sentiment should increase the demand for residential property.
Packirisamy warns that consumers should not get too excited by the cut in interest rate. “The savings generated by lower borrowing costs should be either used to de-gear quicker or be put into a savings product”, she says. Meanwhile, Bishop advises consumers to continue to pay their same monthly repayments to reduce debt levels.
When asked whether South Africa’s economy is on the way to recovery, Bishop said that interest rate cut aside, the SA economy is expected to see higher confidence levels than in Q1.18, lifting fixed investment and economic growth on the continued reduction in political uncertainty, and expected future reduction in policy uncertainty.
Bishop adds that Sarb has not really improved SA’s growth forecast as the cut is too small to make a substantial impact on growth but it may give a very small fractional boost.