Effective 29 of May 2025, the South African Reserve Bank (SARB) reduced the South African repo rate by 25 basis points, setting the rate at 7.25%. On 18 June 2025, the Federal Reserve left the federal funds rate unchanged at 4.5% as policy makers in the US fully evaluate Donald Trump’s policies around tariffs, immigration and taxation. One must remember that Donald Trump still has 3.5 years in the Oval office. Interestingly, the US Fed has projected a further two rate cuts by the end of 2025.
South Africa and counties around the world are in an interest rate cutting cycle and this leaves investors holding lazy cash deposits in a predicament as the banks start to reduce money market rates they offer to their customers. With central banks around the world cutting interest rates, investors should be looking for opportunities to transfer lazy cash deposits to capital growth assets, as this will provide them with a better real return over the long-term.
As with any investment, the objective should be to outperform inflation, costs and taxes so that your money can grow and retain purchasing power in the future. I present two simple scenarios below to highlight how investors currently holding excess lazy cash deposits are eroding the future purchasing power of their money compared to investors investing their excess cash deposits into capital growth assets.
Scenario 1 – After tax return on interest income
For this scenario, I have made the following assumptions:
- Client (individual) is under the age of 55
- Client has a marginal income tax rate of 45%
- Client does not contribute to a retirement product
- Client does not have any capital gain to declare
- Bank money market rate at 7.7633% (effective rate)
Scenario 2 – After tax return on capital gain
For this scenario, I have made the following assumptions:
- Client (individual) is under the age of 55
- Client has a marginal income tax rate of 45%
- Client does not contribute to a retirement product
- Client declares a capital gain of R77,633.00
- Client does not have any interest income to declare
SA inflation rate held steady at 2.8% in May 2025. Scenario 1 above indicates that lazy cash deposits held in a bank money market account would outperform inflation by a measly 0.16%. Scenario 2 presents a better outcome as investors who declare a capital gain rather than interest income would outperform SA inflation by 4.29%.
Don’t get me wrong, investors should hold cash for emergencies, and it is important to have an emergency fund for those unexpected expenses called life. That being said, in a time of global decreasing interest rates, investors should be considering moving excess cash from bank money market products into capital markets.
Disclaimer: Above scenarios are presented to highlight the difference in after tax returns (cash vs. capital gain) and not necessarily the performance of capital markets.
