The South African Reserve Banks Monetary Policy Committee (MPC) has been meeting Wednesday 27th and Thursday 28th of May 2009. The MPC determines the interest rate at which the Reserve Bank lends to the commercial banks. They have reduced the rate by 100 basis points. There has been a bunch of bad economic data recently, with inflation not falling and the economy entering a recession there have been calls to cut the rate. The major effect of a rate cut will be felt in your home loan and this is it will save you on a 20 year bond
- R500 000 home loan = R 344.49 a month in savings
- R750 000 home loan = R 516.74 a month in savings
- R1 000 000 home loan = R 688.98 a month in savings
There have been calls in the financial press for cuts of between 50 basis points and 150. The rate itself was cut by 100 basis points, or one percent, in the end. The general prediction was for 100 basis points or 1%. The analysts got it right! The Reserve Bank has been pursuing a policy of inflation targeting and while consumer inflation was steady at 8.4% Producer inflation was down by 2.9% April 2008 to April 2009. So it's not as bad as it could be. The Reserve Bank has so far followed a calm and prudent policy without too many shocks and this policy has sensibly been continued today.
The Reserve Bank may now end its policy of inflation targeting, but a massive cut in interest rates can lead to our currency getting devalued by speculators. Also it seems that credit extension is still growing which means that the rate cuts that have already happened are starting to take effect and that the banks are still increasing lending even if it is not at the levels seen in December 2008. Inflation is expected to hit its target band of 3% - 6% towards the end of this year and the beginning of 2010 but there have been some calls to change the target band upwards by one percent making a more realistic target that we are more likely to be able to hit.