Following a cut in interest rates at their last meeting in January, and the Finance Ministers decision to lower income tax levels during the budget speech in February, the Monetary Policy Committee (MPC) announced some further relief for South Africans today by lowering the interest rate by 100 basis points. The repo rate drops to 5.25%.
According to Regional Director and CEO of RE/MAX of Southern Africa, Adrian Goslett, this announcement comes at a time when the economy needed it the most. “Ongoing load shedding and global panic around the coronavirus is grinding the South African economy to a holt. GDP has already contracted by 1,4% in the fourth quarter of 2019 and grew by a dismal 0,2% in 2019. Especially after the US Federal Reserve cut interest rates on 3 March to stimulate their local economy, I remained hopeful that interest rates would drop to align with international standards. It is encouraging that the MPC has made the decision to lower interest rates at this meeting, as this will help towards keeping our economy somewhat stable over this time,” Goslett explains.
As much as this announcement will provide further relief to homeowners who are battling to keep up with their monthly repayments, Goslett predicts that this drop in interest rates is unlikely to have any major effects on the current housing market apart from lessening the number of homes that will enter the market as a result of the bank’s distressed property sales programmes.
“Lower interest rates usually incentivise consumers to take on new debt. However, given our current economic outlook, it would be wiser for consumers to use this break to keep up with the repayments on their existing debts. When an economy shrinks, debt becomes increasingly expensive, along with all other consumable goods and services. Despite the interest rate cut, consumers should, therefore, think carefully before taking on any bad debt during this time,” says Goslett.
To clarify what he means by bad debt, Goslett explains that credit card debt is an example of bad debt that will continue to eat into your disposable income and can have devastating long-term effects if not managed correctly. “Property investments, on the other hand, are a form of good debt that will generate high returns in the long run. The interest paid on this kind of debt, therefore, justifies the expense. Rather than taking on bad debts, homeowners can take advantage of the interest rate cut by redirecting the money they’re saving straight back into their home loan. This will save them on interest charges and reduce their home loan period by months or even years,” Goslett concludes.
