Very welcome interest rate relief for consumers – including home buyers and mortgage applicants

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

The 25bps reduction sees the SA Reserve Bank repo rate reduced 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 seized the opportunity to give South Africa’s economy a much-needed boost in sentiment.

Furthermore, with Inflation surprising on the downside in recent months and, with a petrol price cut likely next month (June) – although partially offset by the 15 cents per litre hike in the fuel levy – price pressures are likely to remain subdued. The consumer inflation rate is currently well anchored below the lower limit of the 3%-6% inflation target.

Coupled with this is the fact that local economic recovery was sluggish in the first quarter of the year, with GDP growth forecasts downgraded to around 1.5% for 2025. In addition, consumer confidence trended downwards, partly due to the proposed 2% VAT hike and general increase in the tax burden in the 05/06 Budget.

Meanwhile, the hike in the fuel levy, instead of a VAT hike, is likely to stress already constrained household finances. Apart from providing some debt relief for consumers in general, a reduction in the interest rate is a positive indicator for sentiment in the housing market, providing encouragement for those with existing mortgages or seeking credit to buy 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 weakened amidst a higher tax burden – with no allowance made in the Budget for tax bracket creep to allow for inflation.

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

Analysts arguing for a rate cut ahead of the MPC’s decision noted that at least 15 major central banks have cut interest rates since early-April, when the US administration triggered a wave of turmoil with punitive tariffs hikes which were subsequently temporarily paused.

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

Among the numerous global trends, lower oil prices and a long-term weakening in the US dollar against a basket of its peers could mean a more benign inflation outlook in SA – creating scope for further interest rate relief.

That said, the Bureau for Economic Research (BER) notes that it is a matter of time before the Reserve Bank introduces a lower inflation target, which will also discourage further interest rate cuts as the Bank attempts to anchor inflation expectations around the new, lower inflation target. Given that further rate relief was placed on hold earlier this year due to global developments, the Reserve Bank may now decide to pause to introduce the lower inflation target – which most agree will help further reduce the inflation rate and thus ultimately create scope for additional rate cuts in the future.

Posted by The Know - Pam Golding Properties