SASSA R350 Grant

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Interest rate cut: These are the pros and cons of lowering the rate

The interest rate cut forecast for South Africa is expected to stimulate the economy. But as always, any decision to alter the rate comes with its ups and downs.

SASSA R350 Grant

Photo: AdobeStock

The SA Reserve Bank is expected to announce an interest rate cut on Thursday afternoon, in a move which should usher in a lowering cycle. Currently, the interest rate is at 6.75%, but it could soon be reduced to 6.50% or less by the close of business.

SA Reserve Bank to make a decision

The Rand enjoyed a solid start to the week, as news spread about the rate decision. ZAR has firmed up against the US Dollar in July, and once the official announcement is made, it’s expected to launch another rally against the greenback. As of 13:30 on Wednesday, the Rand was trading at R14.01 to the Dollar

But what are the advantages and disadvantages to implementing these changes? Both interest rate cuts and increases can be double-edged swords. In fact, when they go up, banks are more willing to hand out loans and those with money tucked away get a little more bang for their buck. Here’s what happens when they go down:

Advantages to an interest rate cut

  • Lowering interest rates makes borrowing more affordable for both individuals and businesses.
  • An interest rate cut tends to make houses more affordable and cheapens mortgage payments, too.
  • Lower interest rates make it more attractive to buy assets such as housing. This will cause a rise in house prices, and it is believed, a rise in wealth.
  • All these factors combined encourage increased consumer spending and further investment to stimulate the economy.

Disadvantages to an interest rate cut

  • When interest rates on home mortgages and credit cards fall, the rates on other savings vehicles fall as well.
  • Keeping interest rates at a low rate for an extended period of time can reduce the number of options the government has to stimulate the economy. The avenue eventually becomes a dead end.
  • These type of cuts have the potential to make it less attractive to save money in SA: A fall in the exchange rate makes our exports more competitive and imports more expensive.