The Reserve Bank has cut interest rates by 0.25 percentage points, amid indications that international oil prices could fall further and that slowing global growth could prompt a round of rate cuts by most major central banks. This decision takes the repo rate to 6.5%, the prime lending rate to 10%, and will translate, into a saving of R16 a month per R100,000 borrowed for existing homeowners. On a R1 million loan the saving would be R166 a month and potentially almost R40,000 over R20 years. This rises to savings of R498 a month on a bond amount of R3 million. The change also means that first-time borrowers will now find it easier to qualify for a loan – with the gross household income requirement for a R1 million loan falling from R33,000 a month to R32,000 a month, says Rudi Botha, CEO of bond originator BetterBond. “Equally importantly, it will lower monthly bond repayments and make home ownership more affordable at a time when household budgets are under severe pressure,” said Botha.
The Reserve Bank’s decision follows news that international oil prices are likely to fall thanks to the US declaring bigger reserves than expected and the prospect of a settlement between the US and Iran. “This lowers the risk of a significant rise in local inflation,” said Botha. “China’s economic growth rate has fallen to the lowest level in 27 years and other Asian economies are also struggling, with the result that rates have already been lowered in Korea and Indonesia.”
In addition, the Federal Reserve is expected to lower rates in the US this month, and the European Central Bank recently announced that it is unlikely to raise its borrowing rate from the current 0% until late 2020 at the earliest. “This creates leeway for the Reserve Bank to lower SA rates without the country becoming unattractive to international investors, who are always looking for the best returns on their money,” said Botha. “Indeed, the latest available figures show that Foreign Direct Investment in SA grew by 446% last year and was also positive in the first quarter of this year.”
Botha said this week’s rate cuts should also give the local economy and job creation a much-needed boost at a critical time, and bolster a fragile recent recovery in consumer confidence. “This is vital for the real estate market which runs on positive sentiment, and we hope for increase now in housing demand which has been relatively flat for the past year.”