South African real estate sector welcomes SARB rate hold amid high borrowing costs

The Board of Directors of the South African Reserve Bank (SARB) made an unexpected decision on Thursday to keep the repo rate at 7%. This move was made amid heightened geopolitical uncertainty and persistent inflation risks, despite widespread expectations of an interest rate hike.

Monetary Policy Committee's Decision

The Monetary Policy Committee (MPC) decided that the prime lending rate remains at 10.5% per annum. The vote was split: four MPC members supported keeping rates unchanged, while two advocated for a 25 basis point increase. This underscores ongoing concerns regarding inflation, which reached 5% in June, even as economic growth slows.

Impact of Global Events

SARB Governor, Lesetja Kganyago, stated that the conflict in the Middle East has entered a 'new and volatile phase,' leading to renewed uncertainty in global energy markets. He noted that oil prices, which had previously dropped to around $70 a barrel at the beginning of the month, have now recovered to approximately $90.

Kganyago also reported that the global economy has been damaged by the conflict, but investments related to artificial intelligence have helped offset some of the negative impact.

Domestic Economic Indicators

South Africa's domestic economy grew by almost 2% year-on-year in the first quarter, but this growth is largely driven by export strength rather than domestic demand. Kganyago forecasts a slowdown in the second and third quarters of the current year, citing a sharp drop in consumer confidence and weakening business sentiment.

Portfolio manager Reza Hendricks of PPS Investments characterized the decision as a 'pause, not a reversal of a hawkish stance.' He added that the bank maintained rates because inflation remains too high, risks are elevated, and the bank's forecast anticipates stable rates until the end of the year, with potential cuts only after inflation convincingly returns to around 3%.

Inflationary Factors and Exchange Rate

Recent inflation figures are primarily linked to fuel costs, and the overall inflation rate is expected to remain above 4% until the start of next year, despite temporary relief in fuel prices this month. Kganyago noted that prices for goods other than fuel remained relatively moderate, and the rand exchange rate remained stable, approaching the beginning-of-year level against the dollar and being stronger than the euro, which helped lower import prices.

Nevertheless, he warned about service sector inflation issues, noting increases in insurance, transport, and housing costs, as well as rising inflation expectations. SARB's quarterly forecast model indicates that interest rates are likely to remain generally unchanged until the end of the year, with rate cuts expected only later when inflation sustainably approaches the Bank's target of 3%.

Market Reaction and Expert Forecasts

Following the announcement, the rand weakened to around 16.70 per US dollar, the lowest level since mid-May, as investors reacted to the unexpected decision. Richard Sillier from TreasuryONE noted that the decision caught the market off guard, as the market had anticipated a SARB rate hike. Meanwhile, SARB slightly improved its 2026 economic growth forecast to 1.4% and lowered the inflation forecast to 4.0%, reflecting a more positive outlook.

Economist Professor Raymond Parsons from the Northwestern University School of Business stated that this decision will bring some relief to financially burdened consumers and businesses. He emphasized that the MPC's decision, taken by a 4-to-2 vote, not to raise rates at this time, was unexpected for most economists and the market.

Parsons believes that the central bank's decision reflects an updated assessment of the risks associated with the Middle East conflict and the delayed impact of previous monetary tightening. He posits that the Reserve Bank still believes inflation could return to the 3% target by early 2027, provided global pressures ease and domestic reforms accelerate.

Head of Macroeconomic Research at Standard Bank Group, Dr. Elana Moolman, stated that the door for further tightening remains open if inflation risks intensify. However, she also noted that the Reserve Bank currently deems interest rates appropriate, and its model allows for the possibility of rate cuts late this year.

The South African Reserve Bank (SARB) decided to keep the repo rate at 7%, while the lending rate stands at 10.5%. This decision was made by the Monetary Policy Committee (MPC) on Thursday.

Reasons for the MPC's Decision

The MPC, which held a meeting on Thursday, stated in a release from SARB Governor Lesetjo Kganyago that various scenarios regarding inflation expectations and fuel prices were analyzed before making the decision.

Inflation and Economic Data

This decision followed the South African Statistics Agency (Stats SA) reporting on Wednesday that annual consumer inflation accelerated to 5% in June, higher than the 4.5% recorded in May and exceeding market expectations of 4.7%.

Regarding South Africa's economic growth, the MPC noted that first-quarter growth was stronger than forecasts, approaching 2% year-on-year. However, this growth was driven by an increase in net exports rather than domestic demand.

Forecasts and Concerns

The Committee forecasts a slowdown in growth during the second and third quarters of the current year. It highlighted a sharp decline in consumer confidence and weakening business confidence. According to sectoral surveys, there is a general decrease in activity since the start of the war. Furthermore, export prices have fallen, although trade conditions have improved due to lower import prices.

The MPC added that while there was good momentum at the beginning of the year, households were affected by rising fuel prices, and uncertainty negatively impacted investments. The baseline forecast is that the economy will begin to recover in the second half of the year as the shock subsides, although the overall outlook remains uncertain.

Inflation Expectations and Voting

On the issue of inflation, the committee reported that according to the latest survey by the Bureau of Economic Research, inflation expectations have risen, with short-term changes being more significant than long-term ones. All surveyed groups expected inflation to rise, with the largest change recorded among trade unions. Market expectations for the break-even point softened from May but remain higher than at the beginning of the year, and there is a risk of increased inflation.

In the vote, four members favored maintaining the rate, while two advocated for a 25 basis point increase. The Committee agreed that the situation is uncertain and believes that the current policy, considering the previous rate hike, is appropriate, as rates remain somewhat restrictive.

Expert Assessment of the Decision

Tys van Zyl, CEO of Everest Advisory Services, a financial service provider, suggested that this decision reflects the Reserve Bank's view that current inflationary pressure is primarily caused by external factors. He noted that the recent rise in inflation is largely linked to external reasons, such as rising fuel prices and the subsequent impact on transport costs and the price of other goods and services.

According to Van Zyl, in this environment, raising interest rates might only have a limited impact on current inflationary pressure while simultaneously placing additional strain on an already struggling economy. He also emphasized that this decision will bring welcome relief to many South Africans, allowing financially strained households to stabilize their positions without increasing debt payments, and providing businesses with greater confidence when making investment and expansion decisions.

The South African property market is facing increasing pressure as homeowners, buyers, renters, and developers await the South African Reserve Bank's (SARB) latest interest rate decision. Industry experts note that higher borrowing costs, rising inflation, and increased cost of living have already weakened housing affordability, and many households are struggling with increased mortgage payments.

Pressure on the Property Market

According to Rene Munсами, Chairman of the National Debt Counselling Association (NDCA), housing demand is encountering declining affordability. Buyers are forced to take out smaller loans, while current homeowners face rising repayment costs. Developers and investors are also observing reduced demand and increased financing costs.

Rate Expectations

SARB is scheduled to announce its interest rate decision on Thursday, July 23rd, following the Monetary Policy Committee meeting, which could further impact the market. The NDCA, representing debt counsellors in South Africa, stated that the decision will be made during a difficult period for consumers and the property market. The association notes that the May hike has already increased the cost of servicing home loans and debt in general, while households grapple with rising prices for fuel, food, electricity, and general living expenses.

Many consumers have extremely limited capacity to absorb another rate hike. According to Munсами, inflation rose to 5% in June (compared to 4.5% in May, according to Stats SA), causing serious concern for the Reserve Bank. She emphasized that for homeowners who are already under financial strain, even a small increase can be the deciding factor between maintaining payments and falling into arrears or excessive debt burden.

Preferred Decision and External Factors

From a consumer and economic perspective, the NDCA believes the most appropriate decision for the Monetary Policy Committee is to keep the interest rate unchanged. Although SARB must respond to inflation risks, much of the current pressure is driven by external costs rather than excessive consumer demand. The association believes that a further hike would immediately intensify financial pressure on homeowners, renters, and businesses. Keeping the rate stable would allow the Reserve Bank to maintain a cautious stance and provide time to assess whether the May hike and current inflationary pressures are temporary or persistent.

Consequences of the May Hike

In May, SARB raised the repo rate by 25 basis points to 7%, leading to an increase in the prime lending rate to 10.5%. The Chairman notes that despite the apparent modesty of this increase, it should be considered alongside the rise in food, transport, and utility prices. Munсами added that regardless of how minor the increase in debt payments may be, for a household that does not already have a significant monthly surplus, this additional amount is significant. The cumulative effect leads to reduced affordability, slowed activity, and increased risk of payment problems across the economy.

Impact on Different Groups

Mafebo Sipula, Head of Research and Impact at Property Point, noted that the July rate decision falls at a difficult juncture for the local property market and the broader economy. She recalled that the repo rate is currently at 7.0%, after SARB increased it by 25 basis points in May, and the prime lending rate stands at 10.5%. According to Statistics South Africa (StatsSA), annual consumer inflation accelerated to 5.0% in June 2026, up from 4.5% in May, marking the highest level in two years. Property Point explains that this rise was primarily caused by increased transport costs, especially fuel prices, alongside general inflationary pressure.

According to Property Point data, there are direct consequences: for homeowners, the higher interest rate has increased monthly mortgage payments and placed additional pressure on household budgets; potential buyers, especially first-time homebuyers, face reduced affordability and may receive smaller loans; renters are also struggling due to rising transport, food, and utility costs, affecting their ability to absorb rent increases; and for developers and small businesses operating in the property value chain, elevated financing, construction, and operational costs persist, impacting project feasibility, slowing development pace, and forcing financiers to exercise greater caution. Despite the economy growing by 0.5% in the first quarter of 2026, the growth remains too modest to provide strong support to household incomes, investment, and property demand.