Repo rate expectations – and how much you could save if it drops

Economists expect that the Reserve Bank will decease the repo rate by 25 or even 50 basis points on Thursday. A 25 basis points decrease will already show consumers the light at the end of the debt tunnel, but 50 basis points will be even better.

Independent economist Elize Kruger put this table together to show how decreases of 25 and 50 basis points in the repo rate will affect your bond repayments:

She says although these amounts are small, it all adds up and needs to be seen together with relief at the pumps and also the fact that lower inflation improves household’s purchasing power.

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Reserve Bank usually follows US Fed on repo rate

Albert Botha, head of fixed income at Ashburton Investments, says the US Federal Open Markets Committee (FOMC) meeting is scheduled for Tuesday and Wednesday, with the US interest rate announcement scheduled for Wednesday before the Monetary Policy Committee (MPC) of the South African Reserve Bank’s announcement.

While the timing may seem accidental at first, Botha points out that it presents a challenge: the MPC must make its decision without insight into the Fed’s actions as its meeting precedes the Fed announcement, depriving the MPC of crucial input.

Despite this uncertainty, he says, rate cuts are anticipated in both countries, with some arguing they are overdue.

“In South Africa, the repo rate (the interest rate a country’s central bank lends money at to commercial banks) is at its highest level since the spikes of 2002 and 2008, with the current real repo rate 3.65% above inflation. This real rate exceeds the 2008 peak and is the highest since 2006. Over the last 20 years, the average real repo rate was 1.16%.”

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Inflation under control in South Africa

With inflation under control in South Africa, why has the South African Reserve Bank (Sarb) not cut the repo rate? Botha says once again the answer lies in the US. “The recent inflation scare in the US, slow progress in returning to target levels and persistent economic surprises prevented cuts.

“While South Africa’s real rate is relatively high, the difference between its real policy rate and that of the US is historically low, constraining the Sarb’s actions significantly.”

Botha says the Fed is expected to cut rates by either 0.25% or 0.5% at its upcoming meeting, with further cuts expected in 2024 and 2025, potentially lowering rates to at least 3.5% from the current 5.25%. This represents between 1.75% and 2.5% worth of cuts over the next 12 to 18 months.

He expects that the Sarb will mirror this rate path, with cuts expected at the end of the month and continuing through next year. Projections suggest the repo rate will bottom out between 6.25% and 6.75%.

“These changes will affect various sectors of the economy. For most people, this will provide welcome relief on home loans, credit cards and other debt. New homeowners can expect monthly payments to drop between R750 to R775 per R1 million loan size with the first 1% worth of cuts, while those with about 10 years left on their loans will see a reduction of R620 to R650 per R1 million outstanding.”

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Repo rate can be cut

Tracey-lee Solomon, economist at the Bureau for Economic Research, also expects a repo rate cut of 25 basis points. However, she says the Sarb could decide to frontload cuts and reduce the repo rate by 50 basis points, but this seems a less likely scenario.

“Inflation has come down significantly in recent months. In July, it was 4.6%, likely easing to 4.5% in August, which will be announced on Wednesday. Core inflation was even lower in July. One- and two-year ahead inflation expectations, however, remain above the Sarb’s target.”

Absa’s macroeconomics team also says the stage looks set for the Sarb to begin easing the repo rate this week. They expect the MPC to announce a 25 basis points reduction in the repo rate in line with the Thomson Reuters consensus, with 18 of the 21 analysts (including Absa Research) polled last week calling for a 25 basis points cut while the remaining three expect no change.

“We believe that the case for a cut has strengthened since the July MPC when the committee voted 4:2 (with two supporting a 25 basis points cut) in favour of a hold. We forecast headline inflation to have remained unchanged in August.”

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Most of the risks to the repo rate have receded

Nicky Weimar and Isaac Matshego, economists at the Nedbank Group Economic Unit, say they also expect that the Sarb will cut the repo rate by 25 basis points, taking the repo rate to 8%. “Recent inflation outcomes have been better than expected, with headline inflation dipping to 4.6% after slowing to 5.1% in June from 5.6% in February.

“In addition, most of the upside risks cited by the MPC at its July policy meeting have receded. The rand strengthened significantly over August and held up relatively well in early September. However, the outlook for the world economy remains uncertain.”

The MPC listed four concerns:

• Potential downside risks to the rand if global interest rates, especially in the US, stay higher for longer than the markets anticipate.
• Inflation expectations remain elevated and well above the 4.5% target, although they are moving in the right direction.
• Administered prices are recording sharp increases. While petrol and diesel prices are easing in line with lower global oil prices and a firmer rand, Eskom applied for an enormous tariff hike for next year.
• Services inflation also remains a concern, still uncomfortably above the target.

ALSO READ: Inflation dips below 5% in July for the first time in 3 years

Unchanged repo rate will be hard pill to swallow

FNB economists Mamello Matikinca-Ngwenya, Siphamandla Mkhwanazi, Thanda Sithole and Koketso Mano, also expect a 25 basis points cut.

“Nevertheless, a decision to keep rates unchanged will be a hard pill to swallow. Unlike in the US, the labour market and economic growth in South Africa have not suggested that demand-driven inflation has been a concern for monetary policy.”

Patrick Buthelezi, economist at Sanlam Investments, says with the current repo rate at a 14-year high of 8.25%, all eyes are on the Sarb for potential shifts in monetary policy. “The second quarter of 2024 saw a modest improvement in South Africa’s economic performance, with real GDP expanding by 0.4% quarter-on-quarter.

“The easing of inflation has been crucial in opening the door for potential rate cuts. The Consumer Price Index (CPI) data released in August showed headline inflation dropping to 4.6% in July, down from 5.1% in June. This marks the lowest inflation rate in three years. This downward trend is a positive sign, potentially offering some relief to consumers, particularly in terms of transport and food costs.”