Economists predicted that the South African Reserve Bank (SARB) monetary policy committee would cut the interest rate for South Africa by 25 basis points. Yesterday, 19 September 2024, it was announced that they choose to remain conservative in their approach and make the expected interest rate change. This comes as a response to the other major banks as well as the US lowering their interest rates by 50 basis points.
The SARB’s changes to the interest rate bring the repo rate to 8% and the prime rate to 11,5%. Coupled with the lowest inflation over the past three years, 4,4%, South African businesses can let out a sigh of relief. Miguel da Silva, Managing Executive at Retail Capital, a division of TymeBank, provides insight into what the interest rate in South Africa means for small to medium enterprises (SMEs).
Interest Rate in South Africa Improves Consumer Confidence
“First of all, the interest rate announcement offers a huge sense of relief that we have reached the top end of the interest rate and we are now entering a new cycle of decreasing the cost of borrowing,” Miguel explains. “SMEs will benefit from lower interest payments on existing loans and cheaper borrowing for new loans, improving cash flow and encouraging investment.”
He explains that the lower rates may boost consumer spending, enhancing sales for SMEs, while cheaper financing can spur business growth. “However, interest on savings will decrease, so businesses might reinvest funds into operations. Overall, the announcement leads to improved optimism and business confidence.”
Saving and Spending Changes for SMEs
SMEs can expect suppliers to adjust rates within one to three months if their costs are tied to interest rates. Miguel highlights that it’s key for the SMEs to proactively ask their suppliers for a reduction in cost for the goods they are buying. “If you don’t ask, you most likely won’t get a reduction, so speak to your suppliers.”
Furthermore, a rate cut reduces the interest SMEs earn on savings, leading to lower returns. “SMEs might choose to reinvest savings into their business or seek better investment options,” he adds, giving business owners an alternative for using profits.
To reap the full benefit of this announcement, Miguel advises that SMEs can take the following steps:
- Use the savings in interest payments to build up a cash flow safety net for those unexpected challenges businesses face from time to time.
- Use cheaper credit for business expansion or investments.
- Shift savings into higher-return investments or growth opportunities.
- Renegotiate with suppliers to reflect lower financing costs.
Interest Rates in South Africa Impact Small, Micro and Medium Enterprises Differently
“The impact on small, micro and medium businesses will vary,” he explains. “For medium enterprises, they are better equipped with resources and financial buffers but still face challenges with scaling and compliance.
“For small businesses, which have limited resources, making them more vulnerable to changes and disruptions, this relief is very welcomed.
“For micro businesses, they are highly vulnerable due to minimal resources and operational scale, making them sensitive to market or local changes and so they need further rate cuts to really make a difference.”
Currently, it is expected that the inflation rate will stabilise close to 7% during 2025. The SARB also expects the lower interest rate and repo rate to improve the economy’s growth. The monetary policy committee will meet again in November where further rate cuts might be on the table for South Africans.
With the improvement of interest rates in South Africa, business owners across the SME landscape can gather courage that there is hope for their businesses to survive. 2024 has shown positive impacts on the economy such as lowered fuel prices, food inflation softened and the Rand has grown stronger in recent months. At the sound of this news, SMEs can set their sights on scaling their businesses and growing from strength to strength.
