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Secure your wealth against interest rate cuts

Lower interest rates are great news for borrowers, but they also mean lower returns on your cash investments. Let’s take a closer look at why interest rates are coming down and why there’s still time to secure a higher rate.

The South African Reserve Bank has cut interest rates, lowering the repo rate by 25 basis points.

Last month, we reported that interests rates cuts could occur sooner than expected. This has been borne out by the July cut, which took a number of commentators by surprise.

The rate cutting cycle also looks to be steeper than anticipated. Analysts at Goldman Sachs predict rates could be a full 1% lower by this time next year.

The SARB’s decision is good news in many respects.

The cut signals that the SARB is confident that inflation is moderating, which is welcome news for South African consumers. Reserve Bank Governor Lesetja Kganyago ascribes improved inflation outcomes to the waning effects of the drought (which had pushed up food prices), lower global oil prices and lower electricity tariff increases, amongst other factors.

More directly, the cuts could help stimulate the stagnant property sector and boost productivity more generally. Significantly, from a personal finance perspective, rate cuts will bring much needed relief for borrowers.

Time is of the essence

Lower interest rates have an obvious downside: reduced returns on cash investments. As rates come down, the interest you earn on your savings will also decrease.

Last month, we explained that selecting a fixed-term deposit is an effective way to secure preferential returns before banks reduce their interest rates.

Although the first rate cut has now occurred, there are two reasons why it’s not too late to secure a higher rate:

1. Banks may not immediately adjust their rates to reflect the lower repo rate. Taking immediate action could still secure you the best rate

2. Experts believe that July’s interest rate cut was only the first cut in the cycle. By acting quickly, you can secure a higher rate before subsequent rate cuts occur

Locking in a higher rate

A fixed deposit offers two important benefits: higher returns and a fixed interest rate. By moving your cash into a fixed deposit, not only will you receive a significantly higher interest rate, but that rate will be unaffected by further cuts in the repo rate.

For example, suppose you had cash in a call account earning a nominal rate of 5.5%. On Goldman Sachs’s forecast, that rate would fall to 4.5% by next year and you would be earning lower returns on the same account.

Now imagine you choose instead to invest that cash in a 24 month fixed deposit earning 8%. Not only would you secure much higher returns, you would continue to earn the same high rate for the duration of the investment period, no matter how much the Reserve Bank cut interest rates.

Longer term fixed deposits will likely offer higher returns. You will probably also be able to secure a higher rate by investing larger amounts. However, choosing the appropriate fixed deposit will depend on your personal savings needs. It’s easy to use the My Treasury Savings Optimiser to find the most suitable account.

Why rates are expected keep falling

We view the risks to the inflation outlook to be broadly balanced

Announcing the July cut, Governor Kganyago said that while the inflation outlook can change rapidly, “we view the risks to the inflation outlook to be broadly balanced”.

Kganyago pointed out that the relative strength of the rand, despite political and other shocks, has been an important factor: “The main risk to the inflation outlook has, for some time, been the exchange rate. During the past year, while volatile, the rand has been relatively resilient, considering the adverse shocks it has had to face.”

Kganyago also had encouraging words about South Africa’s economic recovery, saying that “we believe that the worst is behind us – and that growth in the second quarter of this year will be positive”.

Interest rates are expected to continue to fall. Is your money working hard enough for you? Use the My Treasury Optimiser regularly to keep earning higher returns on your cash.