When the dove defeats the hawk

As the economic impact of Covid-19 continues to weaken consumers, corporates, and governments, the Monetary Policy Committee (MPC) of the South African Reserve Bank opted to reduce rates by a further 0.50%. This brings the total reductions in rates since January of this year to -2.75%, and the Prime Lending Rate down to 7.25% (from 10.00%).

This further drop shows quite a “U-turn” in the stance of the committee, as the SARB are clearly stopping at nothing to try and save our economy. These levels are the lowest that rates have been since 1998, and the first time the MPC moved lower at four consecutive meetings, as inflation is broadly expected to average well below the mid-point of the SARB’s inflation target range of 3% to 6%.

The relief provided by lower rates opens a multitude of options for consumers, the optimal being to deleverage and pay down debt faster. For example:

  • Assuming a R1,000,000 bond, if you had locked-in your home-loan repayment before January’s drop in rates and were still paying the same amount monthly, after today’s drop you will be paying an additional R1,746 into your bond every month!
  • Expressed differently, by keeping your payment at the higher level, you will pay off your bond in a little over 13 years as opposed to 20, thereby saving you over R600,000 in interest payments!

The MPC left the door open to further interest rate relief in the months to come, but much will depend on Finance Minister Tito Mboweni’s revised Budget, expected to be tabled mid-June. Reserve Bank Governor, Lesetja Kganyago has, on multiple occasions, said that monetary policy alone can only achieve so much – it depends on a solid policy framework to support growth and investment too. For now though, the doves are in full flight in the MPC, and are clearly more than willing to capitalise on the benign inflation outlook with inflation anticipated well below 6% for the foreseeable future.