If you’re juggling debt and feeling the pinch, you’re not alone. Despite inflation falling below the Reserve Bank’s official 3%-6% target range, interest rates are stubbornly high. On Thursday, the central bank threw us a bone with a tiny 0.25% (25 basis points) cut to the repo rate. But for many, it’s like trying to fill a bucket with a teaspoon.
So, what’s going on? Why does the Reserve Bank seem glued to this “tough love” approach? Let’s break it down.
A good starting point would be our previous explainer about Reserve Banks, interest rates and what it all means. Then dive in below for more on the latest news.
What’s the repo rate, and why should you care?
As we note in our explainer above, the repo rate is the rate at which the Reserve Bank lends money to commercial banks. When it’s high, banks pass those costs on to us through higher interest on loans, credit cards, and mortgages.
Think of it as a thermometer for the economy: turn it up (higher repo rates), and people spend less, cooling inflation. Turn it down (lower repo rates), and spending heats up. The Reserve Bank’s job is to keep the temperature just right.
But inflation’s under control, right?
Technically, yes. South Africa’s inflation rate – which measures how quickly prices are rising – dropped to 2.8% in October, below the Reserve Bank’s 3%-6% target range. That should, in theory, be good news for borrowers.
However, Governor Lesetja Kganyago isn’t popping the champagne just yet. He argues that inflation at 4.5% (the midpoint of the current range) isn’t truly “low.” The Bank wants a level where prices are rock-steady, and any hints of future price hikes are kept in check.
Here’s some jargon for you: real interest rate. It’s the interest rate minus inflation.
Right now, South Africa’s real interest rate is around 5% – extremely high compared to other countries. For context:
- In the US, it’s 2%.
- In India, it’s below 0.5%.
Why does this matter? High real interest rates make it more expensive to borrow money, which can stifle economic growth. Yet, the Reserve Bank sees it as a necessary pain to keep inflation expectations in check.
Critics argue that the Reserve Bank is acting like 3% inflation is already the goal – without officially saying so. But Kganyago is adamant: “It’s no point setting a target that is a secret because the usefulness of the target is to influence inflation expectations,” he said on Thursday.
Translation? People’s expectations about inflation matter. If we think prices will keep rising, we might demand higher wages, which could actually drive prices up further – a wage-price spiral, in economic speak. The Reserve Bank wants to stop that cycle in its tracks.
But it’s not just about inflation. Other global and local factors affecting the value of our rand are at play:
- The Rand Is Weakening
Thanks to Donald Trump’s re-election, the dollar has been strengthening for a host of reasons we won’t go into here, but it means the rand has dropped from R17.29/$ to about R18.15. A weaker rand means higher prices for imported goods – from fuel to electronics – which could push inflation back up.
- China’s Economic Slowdown
China buys a lot of South Africa’s exports, like minerals. But its economy has been sluggish, which affects our trade and growth.
- Food Prices Are Set to Rise
Poor harvests for staples like bread and cereals are likely to push up prices. Meat prices often follow suit. Add Eskom’s proposed electricity hikes (around 13.3% next year), and you’ve got a recipe for rising inflation.
Unfortunately, it looks like high interest rates are here to stay for a while. The Reserve Bank’s forecasts suggest the repo rate will still be at 7.4% by the end of 2025 – barely lower than today’s 7.75%.
If you’re a homeowner, FNB CEO Harry Kellan has some advice: keep your bond repayments steady, even if rates drop slightly. “The saving on interest costs over the term of the home loan will be significant,” he told News24.
The Reserve Bank is in talks with Treasury about lowering the inflation target, which would set a stricter standard for future rate cuts. Meanwhile, economists expect inflation to pick up again next year, especially with the weak rand and rising food prices.
In short: relief may be slow, but it’s coming – eventually. Until then, tighten your belts, keep your budgets lean, and remember: the Reserve Bank’s tough love is all about keeping the economy stable in the long run.
Inflation drops, but why are interest rates still squeezing South Africans?
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If you’re juggling debt and feeling the pinch, you’re not alone. Despite inflation falling below the Reserve Bank’s official 3%-6% target range, interest rates are stubbornly high. On Thursday, the central bank threw us a bone with a tiny 0.25% (25 basis points) cut to the repo rate. But for many, it’s like trying to fill a bucket with a teaspoon.
So, what’s going on? Why does the Reserve Bank seem glued to this “tough love” approach? Let’s break it down.
A good starting point would be our previous explainer about Reserve Banks, interest rates and what it all means. Then dive in below for more on the latest news.
What’s the repo rate, and why should you care?
As we note in our explainer above, the repo rate is the rate at which the Reserve Bank lends money to commercial banks. When it’s high, banks pass those costs on to us through higher interest on loans, credit cards, and mortgages.
Think of it as a thermometer for the economy: turn it up (higher repo rates), and people spend less, cooling inflation. Turn it down (lower repo rates), and spending heats up. The Reserve Bank’s job is to keep the temperature just right.
But inflation’s under control, right?
Technically, yes. South Africa’s inflation rate – which measures how quickly prices are rising – dropped to 2.8% in October, below the Reserve Bank’s 3%-6% target range. That should, in theory, be good news for borrowers.
However, Governor Lesetja Kganyago isn’t popping the champagne just yet. He argues that inflation at 4.5% (the midpoint of the current range) isn’t truly “low.” The Bank wants a level where prices are rock-steady, and any hints of future price hikes are kept in check.
Here’s some jargon for you: real interest rate. It’s the interest rate minus inflation.
Right now, South Africa’s real interest rate is around 5% – extremely high compared to other countries. For context:
Why does this matter? High real interest rates make it more expensive to borrow money, which can stifle economic growth. Yet, the Reserve Bank sees it as a necessary pain to keep inflation expectations in check.
Critics argue that the Reserve Bank is acting like 3% inflation is already the goal – without officially saying so. But Kganyago is adamant: “It’s no point setting a target that is a secret because the usefulness of the target is to influence inflation expectations,” he said on Thursday.
Translation? People’s expectations about inflation matter. If we think prices will keep rising, we might demand higher wages, which could actually drive prices up further – a wage-price spiral, in economic speak. The Reserve Bank wants to stop that cycle in its tracks.
But it’s not just about inflation. Other global and local factors affecting the value of our rand are at play:
Thanks to Donald Trump’s re-election, the dollar has been strengthening for a host of reasons we won’t go into here, but it means the rand has dropped from R17.29/$ to about R18.15. A weaker rand means higher prices for imported goods – from fuel to electronics – which could push inflation back up.
China buys a lot of South Africa’s exports, like minerals. But its economy has been sluggish, which affects our trade and growth.
Poor harvests for staples like bread and cereals are likely to push up prices. Meat prices often follow suit. Add Eskom’s proposed electricity hikes (around 13.3% next year), and you’ve got a recipe for rising inflation.
Unfortunately, it looks like high interest rates are here to stay for a while. The Reserve Bank’s forecasts suggest the repo rate will still be at 7.4% by the end of 2025 – barely lower than today’s 7.75%.
If you’re a homeowner, FNB CEO Harry Kellan has some advice: keep your bond repayments steady, even if rates drop slightly. “The saving on interest costs over the term of the home loan will be significant,” he told News24.
The Reserve Bank is in talks with Treasury about lowering the inflation target, which would set a stricter standard for future rate cuts. Meanwhile, economists expect inflation to pick up again next year, especially with the weak rand and rising food prices.
In short: relief may be slow, but it’s coming – eventually. Until then, tighten your belts, keep your budgets lean, and remember: the Reserve Bank’s tough love is all about keeping the economy stable in the long run.
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