Rate Cut – Stimulus for Economy & Property
The decision by the Reserve Bank’s Monetary Policy Committee to cut the repo rate by 100 basis points to 5.25% (from 6.25%) reducing the mortgage rate to 8.75% (from 9.75%) is a welcome stimulus for the economy and property market.
This cut will help when the recovery starts, says Samuel Seeff, chairman of the Seeff Property Group. “It takes the interest rate down to levels last seen in the 2012/3 period and is at one of the lowest levels in decades. It is in keeping with global developments given that the world economy is now in recession and potentially facing a similar situation to the 2008 Global Financial Crisis,” adds Seeff.
“Central banks across the world have responded with aggressive rate cuts and the US Fed has just provided a second emergency cut bringing rates down to near-zero and launching an aggressive economic stimulus package.”
Seeff adds: “Given that SA does not have the reserves to match any such stimulus and is fiscally under massive pressure, it is necessary for the Reserve Bank to come to the aid of the economy and provide assistance to South Africans. Seeff says that the Bank’s stance over the last year has been too hawkish with only two 25bps cuts despite there being ample reasons and calls for more aggressive cuts to boost the economy.”
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. 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,” explains Goslett.
“We believe that the cut of 100 basis-points is necessary and will support much needed economic growth. While the rate has not been cut at sequential meetings since 2010, there are pressures for the bank to ease monetary policies,” says Marcél du Toit, CEO, Leadhome. He adds that this interest rate cut will result in a much more positive buyers mindset and give the market the boost it needs.
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.
“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,”says Goslett.
“This cut will provide much needed relief for households and small businesses and aid those with debt and home loans. It will provide a vital boost for the property market. Contrary to expectation, the market has been active this year and people have continued buying, but, he says, we will need to wait and see what effect the crisis will have,” concludes Seeff.