What a big change for the Reserve Bank could mean for R10,000 per month home loans in South Africa

 ·23 Jan 2025

There is a growing debate about potentially shifting South Africa’s inflation target lower, which experts at PwC say could lead to a positive move in interest rates and assist those who are looking for home loans.

The South African Reserve Bank (SARB) currently targets an inflation rate at the middle of a broader target range that was established in 1999.

The range is set between 3% and 6%, with the SARB in more recent years explicitly targeting 4.5%.

According to PwC, the intention was always for the inflation target to shift downwards, with SARB Governor, Lesteja Kganayo, saying in 2021 he would prefer the range to be around 3%, with a wider range of 2% to 5%.

The central bank was supposed to follow a path to lower the inflation target in 2004, but this goal was stymied by significant rand depreciation during 2001 caused by the global financial market fallout from the Argentine currency crisis, PwC said.

As a result, South Africa’s inflation target has been stuck for over 20 years in the same place, and relatively higher than other markets.

National Treasury started an evaluation of the target three years ago, which Kganygo noted in late 2024 was coming to an end.

PwC said that an outcome and a possible move to a new inflation target could follow sometime in 2025—even perhaps at the 2025 Budget. However, there is currently no set timeline.

However, the question still remains as to what impact moving the target range will have on consumers.

Reserve Bank Governor, Lesetja Kganyago

If you have R10,000 per month available for a house

According to PwC, an oft-cited concern with moving the target lower is that there will be a trade-off between inflation and economic growth—where a lower target would be followed interest rate hikes, negatively impacting growth,.

However, Kganyago has refuted this, saying the SARB’s move to an explicit target of 4.5% saw inflation expectations adjusted accordingly, and there was no reduction on aggregate demand.

This was supported by two independent studies.

Instead, the governor noted that by lowering the target and managing expectations, South Africa could see “structurally lower interest rates”.

Explaining it in practical terms, PwC said that, at present, the inflation goal of 4.5%, combined with a real interest rate goal of 2.5%, results in a long-term aim of 7.0% for the repo rate or 10.5% for the prime rate.

“At that level, a person that has R10,000 per month available for a mortgage would qualify to get a home loan of R1,046,000.

“If the inflation target is lowered to 4.0% and the real interest rate goal is identical (2.5%), that R10,000 would get them a loan of R1,086,000 at a repo rate of 6.5% and a prime rate of 10.0%,” it said.

If Kganyago’s wish for a 3.0% target is granted alongside the same real interest rate goal, the loan would be even higher—around R1,136,000 at a repo rate of 5.5% and a prime rate of 9.0%.

“In essence, lower long-term interest rates would enable South Africans to acquire a higher value home for the same monthly repayment and salary, thereby boosting household wealth creation,” the group said.


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