Understanding Real vs. Nominal Interest Rates in South Africa

Why the “lowest rate” isn’t always the cheapest money

When you hear that the prime interest rate hit a record low, it sounds like borrowing money is super cheap. But the real cost of a loan depends on inflation, too. If prices are rising fast, the money you repay is worth less, making the loan cheaper in real terms. If inflation is low, you’re paying back almost the same amount you borrowed, so the loan feels more expensive.

Turning point #1 – September 2020

Numbers on the surface

• Prime rate: 7 % (the lowest in decades)
• Inflation: 3.2 %
• Real cost of debt (prime rate minus inflation): about 3.8 %

At first glance, 7 % looks cheap, but after stripping out inflation you’re still paying nearly 4 % in real terms.

What changed by July 2022?

• Prime rate climbed to roughly 9 %
• Inflation jumped to about 8 %
• Real cost of debt fell to around 1 % (9 % – 8 %)

Even though the nominal rate went up, the high inflation made borrowing feel much cheaper.

Turning point #2 – February 2026

The numbers flip again

• Prime rate dropped to 10.25 % from its recent peak
• Inflation settled back at 3.2 %
• Real cost of debt rose to about 7.1 % (10.25 % – 3.2 %)

Now the loan looks cheaper on paper, but with low inflation you’re actually paying a high real cost.

Three key take‑aways from Prizm Property Partners

Nominal vs. real move in opposite directions

When the nominal interest rate goes down, the real cost can go up if inflation falls even faster, and vice‑versa.

Don’t trust the rate on the term sheet alone

Thinking the interest rate you see is exactly what you pay is a costly habit. You must always subtract inflation (and consider other factors like currency shifts) to know the true price of borrowing.

Lesson from January 2004

The prime rate peaked at 11.5 % while inflation was only 0.4 %, making the real cost appear over 11 %. However, that low inflation was distorted:

• The rand had more than doubled since its 2001 crash, lowering import prices.
• The consumer price index still included mortgage bond rates, which had just been cut by the Reserve Bank, pulling the index down.

When you strip out those quirks, inflation was closer to 4 % and the real cost of debt was about 7‑8 % – still high, but not the scary 11 %.

Was 2020’s “cheap money” really cheap?

The period around September 2020 felt like a borrowing bonanza because the prime rate was low. Yet, with inflation at just 3.2 %, the real cost was still near 4 %. In other words, the money wasn’t as cheap as the headline rate suggested.

Does today’s easing cycle feel cheaper than it actually is?

When the Reserve Bank starts cutting rates again, many people will celebrate cheaper loans. But if inflation stays low, the real cost of borrowing could remain high. Always look at both numbers before deciding.

What to watch before the SARB meeting on July 23

The lead‑up matters as much as the decision

David Ingle from Seeff Bedfordview says the tone of the Reserve Bank’s communication tells you whether a rate change is a one‑off reaction to global shocks or the start of a longer trend. That tone influences buyer confidence more than the exact percentage point.

Fuel is driving the recent inflation spike

Bianca Lakha points out that most of the recent rise in inflation comes from fuel:

• Gasoline up ~25 % for the year
• Diesel up >50 % due to oil prices and Middle‑East conflict

If you strip out fuel, inflation has hovered around 3.7 % for a full year, and food prices have actually fallen.

The SARB’s tough choice

With fuel‑driven price pressure, the Reserve Bank asks:

Are we raising rates to fight a supply shock we didn’t cause and can’t fix?

Higher rates won’t lower diesel prices, but they can keep the shock from spilling into wages and long‑term expectations – a risk known as “second‑round effects.”

Conclusion

Interest rates tell only half the story. To know whether borrowing is truly cheap or expensive, you must always subtract inflation and consider what’s driving price changes. The lowest nominal rate in a generation (2020) wasn’t the cheapest money when you look at the real cost, and today’s easing cycle may feel cheaper than it actually is if inflation stays low. Smart borrowers watch both the rate and the inflation outlook, and they pay attention to the Reserve Bank’s tone—not just the numbers—before making decisions.