Interest rate cut by one percent

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.

Last round of rate cuts?

The Monetary Policy Committee of the Reserve Bank will be meeting this week on the 27th and 28th of May 2009. The MPC has been consistently cutting interest rates as part of its policy of inflation targeting. There is wide speculation that the MPC will cut rates again this week to the tune of 100 basis points or one percent. This would take the Repo rate down to 7.5 and the Prime rate to 11 percent. Will this save you anything on your homeloan? We looked at what you could save, per month, if a cut or 50, 75, or 100 basis points would have on your million Rand mortgage over 20 years.

• A 50 basis point cut will save you R 346.56
  
• A 75 basis point cut will save you R 518.3
  
• A 100 basis point cut will save you R 688.98

At the moment the commercial banks all charge 3.5% on top of the Repo rate (this is the rate at which the Reserve Bank sells currency to the commercial banks) and there has been some controversy about this spread so the Guv, Tito Mboweni, met with the banks on Thursday 21st May to talk with them about it. The upshot is that the Reserve Bank has established a technical sub-committee to look into the matter and to report back ASAP. 'The sub-committee is convened by Mr Cas Coovadia (Banking Association South Africa) and Dr Roelf du Plooy (South African Reserve Bank)'.

If this spread was to change then you could expect to pay different amounts on your homeloan than those listed here. The 3.5% gap has created a lot of controversy, with some analysts saying it is too much while others say that it is too little. The point is that the lower an interest rate you can get on your mortgage the cheaper it will be for you to pay off. The banks are commercial organisations and have their own responsibilities, but if a more consumer centric approach to setting the gap between Repo and Prime emerges that would be best for you.