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The South African Repo rate is an important figure to watch, especially if you have debt liabilities which are based on a floating rate. The Repo rate is the rate at which the South African Reserve Bank (SARB) lends money to commercial banks in the event of any shortfall in funds. Effectively it determines the “cost of money”.

The South African Reserve Bank (SARB) has adopted an inflation targeting framework in its monetary policy which means their primary objective is to achieve and maintain price stability in the interest of sustainable and balanced economic development and growth. Inflation is directly linked to purchasing power, by keeping inflation within a targeted range, an economy can be stimulated for growth but also be managed so that prices don’t go through the roof and become unaffordable.

The Monetary Policy Committee (MPC) of the Reserve Bank meets every two months to discuss monetary policy and it is the vehicle through which decisions are made based on a consensus view. The committee consist of 8 members, the Governor, 3 deputy governors and 4 senior officials of the Reserve Bank. The MPC has a target inflation range of between 3% and 6%.

It can be adjusted in an attempt to influence market conditions and to influence inflation. The central bank can increase rates in an attempt to curb spending and encourage saving, effectively decreasing inflation as the demand for goods decreases which in turn lowers prices. Conversely, they could also decrease interest rates to make the cost of money cheaper, encouraging banks to lend and consumers to spend, effectively increasing inflation. Another tool which central banks use to influence the market is the Money Supply, for example, the US and Europe have adopted a policy of quantitative easing in the recent past in an attempt to stimulate the economy. Effectively, the bank “creates” money and buys up assets from commercial banks and other financial services companies in order to allow them to lend more by alleviating their cash reserve requirements. QE is often seen as a last resort and has been adopted in the US and UK as interest rates are already so low that they cannot be used as a tool to influence the market.

So, why should you, the consumer, be interested in the MPC’s decision around the Repo rate. The answer is simple, the Prime interest rate, or the rate which is most often reference by lenders when they quote you a rate on your home loan or vehicle finance is directly correlated to the Repo rate. If the Repo rate increased by 50 basis points (0.50%), so will the Prime rate. Therefore, if you have a floating home loan based on Prime, your monthly installment will increase if the Repo rate increases. As a result, your bottom line is directly linked to changes in the Repo rate.

With that in mind – what is expected to happen at this week’s MPC announcement on Thursday 29th January? While the MPC has made it very public knowledge that they are and have been in a rate hiking cycle, inflation in December 2014 had fallen to 5.3% which was below analysts’ consensus. This is comfortably within the targeted 3-6% range and is expected to continue falling throughout the year to average around 3.6% according to a Standard Bank analyst. While we are still technically in a rate hiking cycle, all 37 analysts surveyed by Reuters predicted that the Repo rate will remain unchanged at 5.75% at this week’s meeting. The SARB had been steadily increasing rates throughout 2014 in order to curb inflation and their attempt to do so has worked, we are now starting to see the results. The question is, have they over done it and should we be expecting rate cuts in the future? It may be too soon to tell but a 25 basis point cut (0.25%) by the middle of the year should not be ruled out.

As a consumer with any exposure to the Prime lending rate, you should keep abreast of what the MPC is up to. With a new Governor, Lestja Kganyago, at the helm after Gill Marcus stepped down in November last year, it will be very interesting to follow the developments within the committee over the next 6 to 12 months.

The MPC meeting dates for 2015 are as follows:

27 – 29 January 2015
24 – 26 March 2015
19 – 21 May 2015
21 – 23 July 2015
19 – 23 September 2015
17 – 19 November 2015

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