South Africa Unexpectedly Cuts Interest Rates

Thursday’s Reserve South African Reserve Bank’s Monetary Policy Committee Meeting resulted in an unexpected cut in interest rates by 50 basis points. The new repo rate is now 5%, while the prime rate now stands at 8.5%.

This is the first cut in almost two years, pointing that South Africa might not be as unaffected by the ongoing global economic turmoil as some expected. Even worse, the negative spillover is likely to intensify. A number of emerging economies had recently already decided to reduce their interest rates (ie China, India and Brazil).

Also, the central bank downwardly adjusted its growth forecast to from 2.9% to 2.7%, with perhaps further reductions ahead. The near-term inflation outlook has also been lowered and now stands at an average for 2012 at 5.6%, with mid-2013 looking at a forecasted low of 4.9%, before picking up slightly above 5% by the end of 2014.

Taking a look at the accompanying press statement, the central bank does not seem to be on a renewed path of easing interest rates. Although the decision to cut the rates yesterday was unanimous, some might argue that this decision did not come lightly, which means that the chances of another rate cut decision at the next rate meeting (there are 2 left in 2012) will be an even tougher one.

The impact on the real estate market is straightforward, assuming the banks pass these savings onto consumers, as bonds will be cheaper and the affordability improves. Those (first-time) homebuyers who have been waiting to jump on the property bandwagon will now have an extra reason to get involved.

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