Good news for motorists financing their cars in South Africa

The South African Reserve Bank’s (SARB) Monetary Policy Committee (MPC) today cut interest rates for the third-consecutive time.

The MPC slashed the national repo rate by by 0.25 basis points (bp) to 7.50% and the prime interest rate to 11.00%, in line with industry expectations.

The improvement in lending rates can largely be attributed to the latest inflation data that came in at 3.0%, well below the SARB’s midpoint target of 4.5%, which it expects will be the norm for the first half of 2025.

That said, there are upside risks on a macroeconomic scale that are expect to push inflation back up to 4.5% in the second half of the year.

“In major economies, inflation may be getting stuck above targets, and expectations for rate cuts have been pared back,” said the MPC.

This is clearest in the United States, where the Federal Reserve left rates unchanged in January after three consecutive cuts.

Additionally, the MPC expects the economy to have made a rebound in Q4 2024 following a weak Q3 performance off the back of an unusually sharp decline in agricultural production.

“This will be supported by more normal agricultural production, as well as strong household spending, given tailwinds including lower inflation and Two-Pot pension withdrawals,” said the MPC.

“We think this expected rebound in growth will close the output gap, leaving the economy to operate in line with its potential from the current quarter onwards.”

As the economy recovers, the MPC anticipates improvements in the primary and secondary sectors, as well as a pick-up in investment.

“Against this backdrop, the MPC decided to reduce the policy rate by 25 basis points, with effect from 31 January 2025,” it said.

Four members preferred this action, while two supported an unchanged stance.

The table below shows how the new interest rate of 11.00% will impact your monthly car finance contract, based on a 72-month deal with no deposit or balloon payment:

Looking ahead

Looking ahead, the MPC expects economic growth to trend higher, reaching 2% per annum by 2027.

Over this time, it sees the report rate stabilising near 7.25%, however, this rests largely on market conditions playing out as expected. Should any new risks develop, the forecast will change accordingly.

Given the challenging global environment, the MPC studied two possible scenarios that could impact credit holders over the coming years.

The first is a trade-war scenario, which featured a universal increase of 10 percentage points in US tariffs, with retaliatory measures by other countries.

“The scenario showed higher inflation and interest rates globally, as well as greater risk aversion in financial markets,” said the MPC.

“In response, our model projected the rand depreciating to nearly R21 to the dollar, with domestic inflation reaching 5% and the policy rate half a percentage point higher, at its peak, relative to the baseline forecasts.”

It also looked at a scenario of accelerated structural reforms within South Africa, which showed growth picking up gradually to 3% in 2027.

“Importantly, this scenario also showed lower inflation and lower interest rates in South Africa, demonstrating how structural reforms can reduce the country risk premium and create more monetary policy space,” it said.

“Considering the difficulties of the external environment, it remains crucial to sustain domestic reform momentum while protecting macroeconomic stability.”

Additional measures that would improve economic conditions include reaching a prudent public debt level, further repairing and strengthening network industries, lowering administered price inflation, and keeping real wage growth in line with productivity gains.