The Prime Lending Rate of the Reserve Bank

On 18 July 2019 the South African Reserve Bank cut its benchmark repo rate by 25 basis points to 6.5 percent. This is the first reduction of the interest rate since March last year. The repo rate is the benchmark interest rate at which the Reserve Bank lends money to commercial banks and the prime rate at which commercial banks lend money to borrowers.

Reserve Bank Governor Lesetja Kganyago commented as follows (excerpt only):

“The inflation forecast generated by the SARB’s Quarterly Projection Model (QPM) is for headline   inflation to average 4.4% in 2019 (down from 4.5%). The projections for 2020 and 2021 remain unchanged at 5.1% and 4.6%, respectively. Headline CPI inflation is expected to peak at 5.4% in the first quarter of 2020 and settle at 4.5% in the last two quarters of 2021. The forecast for core inflation is lower at 4.4% in 2019 (down from 4.5%), 4.7% in 2020 (down from 4.8%) and is unchanged at 4.5% in 2021.”

Governor Kganyago has predicted growth to be 0.6% this year, down from the predicted 1.8% in   January. He said that the bank was, therefore, cutting the rate to encourage growth, saying inflation had stabilised.

Examples of how interest rate changes can affect everyone:

Home Loans and Vehicle Loans

A rate cut can prove beneficial with home financing, but the impact depends on what type of loan the consumer has, whether fixed or adjustable and which rate the loan is linked to. For fixed-rate loans, a rate cut will have no impact on the amount of the monthly payment. Low rates can be good for         potential homeowners, but fixed-rate mortgages do not move directly with the Reserve Banks      changes.

Credit Cards and Savings Accounts

The impact of a rate cut on credit card debt and savings accounts is also linked to the prime lending rate, so a Reserve Bank rate cut will typically lead to interest charges.

This article is provided for information only and does not constitute the provision of professional advice of any kind.

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