Interest Rates - SA Reserve Bank leaves repo rate untouched at 5%

The Reserve Bank’s Monetary Policy Committee (MPC) announced on 24 January 2013 that it had again kept the benchmark repo rate unchanged at 5% in line with market expectations, thereby seeking to balance weakening economic growth against a deteriorating inflation outlook and a sharply weaker rand. While it was expected that the rand would continue to remain both volatile and sensitive to domestic and global developments, further sustained depreciation was not envisaged in the coming months.

The MPC, thus, emphasised its deep concerns about rising food prices, which could pose a significant near-term risk to the inflation outlook, and a depreciating rand exchange rate in a period of slowing growth. Ms. Gill Marcus, the Governor of the Reserve Bank, indicated that the current stance of the MPC was felt to be both “… accommodative and appropriate, with the real policy rate remaining slightly negative, notwithstanding the expected temporary breach of the inflation target.” She noted, in addition, that further monetary easing was constrained by upside risks to the inflation outlook.

Inflation had risen slightly more during the period under review than had been anticipated. The year-on-year inflation rate, as measured by the consumer price index (CPI) for all urban areas, was 5,7% in December 2012 as against 5,6% in November. This factor had significantly reduced the Bank’s ability to cut rates so as to spur increased economic activity in a slowing growth environment. The weaker rand, allied with a deteriorating current account deficit, had also weighed heavily on the Bank’s ability to reduce interest rates. The Bank’s current inflation forecast, furthermore, reflected a continuing deterioration in the inflation outlook for 2013 as compared with its previous forecast. It was also believed that domestic economic growth remained not only fragile but below potential. This followed an annualised growth rate of 1,2% in the third quarter of 2012 and an estimated growth rate of around 2,5% for the year. A similar outcome was expected in 2013 with a forecasted growth rate of 2,6% as against the, 9% that had previously been predicted.

The outlook for significant parts of the mining sector was bleak consequent upon continuing labour disputes and announcements of the possible closures of shafts and mines due to increased cost pressures as well as weak global demand and lower prices.

Business sentiment, furthermore, remained negative as reflected in the continued weakness in private sector gross fixed capital formation. Growth in consumption expenditure by households also moderated in the third quarter of 2012. While the MPC did not assess growth in household consumption expenditure to be either excessive or to pose any significant inflationary risks, it remained concerned about the potential impact on employment and inflation of the higher level of wage settlements. The MPC was especially mindful of the danger of a possible wage-price spiral, which could result in further employment losses, should unaffordable real wage demands be granted at a time when economic growth remained constrained.

Ms. Marcus also noted that the global growth outlook position remained subdued and challenging notwithstanding the noticeably improved sentiment that followed the conclusion by Congress, at the very last moment, of the interim deal to avert the looming fiscal cliff crisis in the United States. It was unfortunate, though, that the major fiscal cliff issues themselves had still to be resolved since vital decisions on expenditure cuts and the debt ceiling had merely been postponed until later in the year. On the more positive side, however, there were continued signs of a much welcomed recovery in the US housing market and, also, improved corporate profitability.

Insofar as Europe was concerned Ms. Marcus indicated that it seemed that the sovereign debt risks in the Eurozone had temporarily abated while bond spreads on peripheral European debt had also narrowed significantly. The region was, however, likely to remain in recession for much of 2013 as fiscal tightening and balance sheet repair by banks and households continued.

Ms. Marcus was far more encouraged by the positive outlook for emerging markets and, particularly, for those in Asia. She pointed out that the Chinese economy had stabilised while general consensus forecasts suggested some growth acceleration for both China and India in 2013. Growth in Africa was expected to sustain rates in excess of 5%. Growth rates in Latin America, while more restrained, would probably also show an improvement over those of 2012.

It had, as a result, come as no surprise - either to the market or to most economists - that the MPC had decided to keep rates steady. The tone of the announcement made by the MPC will, of course, continue to be closely scrutinised for evidence of possible clues as to the future actions of the Bank in the succeeding months. Some economists have already predicted that the next interest rate move will be a 50 basis point increase in 2014.

RE/MAX comments on the interest rate

Adrian Goslett, the Chief Executive Officer of RE/MAX of Southern Africa, commented that the MPC announcement would be met with relief by consumers who were likely to be recovering from their festive season spending.

Mr. Goslett noted that 2012 had proved to be an interesting year. Following an unanticipated reduction of 50 basis points, the prime interest rate had been reduced to 8,5%. Mr. Goslett believes that interest rates will remain range-bound between 8,5% and 9,5% for the next 12 months.

According to Mr. Goslett:

“The real estate market continued to show improvement throughout last year in terms of both sales volumes and property prices and while lending criteria remained stringent, 2012 was a solid year for real estate across the country. Although some of the same issues that were experienced during 2012 such as high debt-to-income ratios, rising cost of living and a poor savings culture will continue during 2013, pushing demand in the rental market, aspects such as the steady interest rate will bring about opportunity in the housing sector.”

Mr. Goslett believes, furthermore, that house prices will continue to see a measured increase during 2013, especially in the high demand areas and price brackets. This notwithstanding potential buyers, who are credit worthy and have access to finance, will be able to find property investment options that meet both their criteria and their pocket.

Seeff Chairman says that unchanged interest rate reinforces positive sentiment in the housing market

Seeff Chairman, Samuel Seeff, concurred that the decision by the Reserve Bank’s Monetary Policy Committee to keep the interest rate unchanged did, indeed, represent welcome news for home owners and prospective buyers alike. Mr. Seeff believed that while the slowed economic growth and upward inflationary pressure of the second half of 2012 could possibly exert a negative impact on property demand, the sentiment within the property market remained overwhelmingly positive - to the extent that there was presently a greater willingness by consumers to buy property than was the case three years ago. Mr. Seeff noted that trading volumes, however, still fell short of what could be considered to be normal trading conditions. He attributed this to the strained macro-economic environment, high household debt levels and tight mortgage credit granting. He said that, “We are now at the end of a five-year cycle since the introduction of the National Credit Act in 2007 and onset of the economic slump of 2008 and, indications are that trading volumes have settled at stable, albeit flat levels and can surely only go up from here.”

Mr. Seeff believed that, with house prices set to remain flat during combined with the low interest rate, “We are amidst the best buyers’ market in more than three decades. Certainly, those who are able to buy right now should do so.” He added that, “Even a 1% to 2% interest rate hike would still make mortgages more affordable than five years ago, but this will not remain the case for too much longer.”

Mr. Seeff cautioned, nevertheless, that home owners should remain mindful of utility price hikes and, especially, electricity prices which were likely to rise well above inflation over the next two years. Transport costs were also likely to continue climbing this year while basic food prices would, he said, also see upward pressure. He urged home owners and prospective buyers to take a conservative outlook and to focus on bringing their debt levels down by, preferably, buying within their means.

Mr. Seeff concluded by stating that there were, “… plenty of good buys in the market and buyers are certainly able to find good value and smart buyers are taking advantage of the favourable buying conditions. Despite the tight home loan lending criteria, the banks are willing to lend when it makes financial sense and the buyer has a good credit record and is able to invest a deposit.”

Source: SA Commercial Prop News

Courtest: The Estate Agency Affairs Board

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