Relief for farmers as interest rates again

By Glenneis Kriel | 26 November 2024 | 3:41 pm

The recent interest rate cut will give farmers some financial breathing space, according to major banks in the agricultural sector.

Following last month’s 25 basis point cut, the South African Reserve Bank’s Monetary Policy Committee has decided to cut interest rates by another 25 basis points this month.

The repo rate, which climbed from 3,5% in 2021 to 8,25% by 2023, now sits at 7,75% and the prime rate at 11,25%.

The Monetary Policy Committee stated that it was being cautious as monetary policy in major economies remained restrictive because of new inflation pressures, heightened uncertainty and underlying inflation still being above target in several countries.

In South Africa, headline inflation lowered for the fifth time in a row to 2,8%, due to lower goods prices, a stronger rand and cheaper oil compared with last year, and the committee expected inflation to stay below 4% until mid-2025.

From then on, potential increases in food, water, electricity and insurance costs, as well as wage settlements, might drive inflation up to 4,6% in the fourth quarter of 2025, where it may stay throughout 2026. The South African Reserve Bank target range is between 3% and 6%.

The economy is expected to grow around 1,1% in 2024, whereas growth for 2025 has been adjusted upward from 1,6% to 1,7% due to lower inflation, more money in people’s pockets and increased spending from pension withdrawals under the new two-pot system.

The growth outlook for 2026 remains at 1,8%. The Monetary Policy Committee said that ongoing reforms, such as in the electricity and transport sectors, could result in economic growth being

higher, while a positive outlook on South Africa’s credit rating from Standard & Poor’s pointed to an improving country risk premium.

Themba Rikhotso, CEO of Land Bank, said the rate cut was a step in the right direction, but in his view, it should have been at least 50 basis points: “Many of our farmers are experiencing financial difficulties. They are in dire need of relief and a bigger rate cut would have been the financial boost they required.”

For Land Bank itself, the cut could reduce repayment defaults. “The rate cut may help to reduce expected credit losses, and so positively contributes to the quality of our loan book. Some of the farmers who could not qualify for financing may also now qualify, albeit marginally,” Rikhotso said.

Paul Makube, senior economist at FNB, said that there was room for a 50-basis point cut, but FNB expected the 25-basis point cut because of the riskier global economic environment.

He said the interest rate cut was a welcome respite for farmers and would help to improve sentiment: “This has been a difficult financial year for many farmers, and any reduction in costs will help to get them back on their feet. It might also result in farmers reconsidering projects they have put on hold over the past couple of years because of the high interest rate.”

Marlene Louw, senior agricultural economist at Absa AgriBusiness, said Absa expected the interest rate to be cut by no more than 25 basis points for stability purposes. She said farmer income had been under pressure since the start of the COVID-19 pandemic, and any cost cuts were welcome.

John Hudson, head of agriculture at Nedbank Commercial Banking, said primary and secondary agricultural debt were currently estimated at R280 billion. The interest rate cut, therefore, was an important step benefitting the agriculture sector.