Reserve Bank raises repo rate
STRATEGY: ELEVATED INFLATION RISKS A FACTOR
Property market likely to take a further knock.
The South African Reserve Bank (Sarb) increased its benchmark interest rate for the first time in more than two years, as it sees inflation risks staying elevated.
The Monetary Policy Committee (MPC) voted to increase the benchmark repurchase rate to 6.75% from 6.5% yesterday. Of the six panel members, three preferred a rise and three favoured an unchanged stance, Governor Lesetja Kganyago told reporters.
Delaying the adjustment could cause inflation expectations to become entrenched at higher levels, which would require even stronger monetary response in future and the MPC still sees its stance as accommodative.
The central bank has had to balance its goal of anchoring price growth close to the 4.5% midpoint of its target with the needs of a shrinking economy.
While the rand’s recent gains and the plunge in the oil price trimmed inflation expectations, the MPC forecasts price growth will stay well above 5% in the next two years.
Sarb now forecasts 2018’s growth to average 0.6% (September: 0.7%), and 1.9% and 2.0% for 2019 and 2020 respectively.
Commercial banks will now lift their prime lending rates from 10% to 10.25%, said FNB Property Sector Strategist John Loos.
Industry generally seemed disappointed with the decision, coming on the back of the recession and lagging economy.
NWU Business School Economist Professor Raymond Parsons said: “Household spending is vulnerable to higher rates and the MPC confirms that demand pressure is not a problem.
“Consumer and business confidence are likely to reflect the negative impact of the prospect of rising interest rates.”
“Apparently this is a ‘risk mitigation’ strategy. Are they trying to avoid stagflation? But we still need to create jobs, and for that we need to grow the economy... Where do the real risks lie?” Cartesian Capital CEO and MD Anthea Gardner tweeted.
Brenthurst Wealth MD Brian Butchart tweeted: “I hope the Black Friday shoppers take note and proceed with caution when buying on credit”.
FNB Property Sector Strategist John Loos said: “Coming at a time when the economy is very weak, the decision is likely to dampen confidence in the property market further, sustaining the gradual correction in the market.”
He said key impacts of the decision on the property market include:
Confidence levels are likely to deteriorate.
The all commercial property vacancy rate is likely to continue to rise in the near term.
Commercial Capitalisation rates are expected to rise in the near term.
Property values are likely to keep declining in “real” terms (property price growth adjusted for general economy-wide inflation).
There has been a recent mild increase in financial stress levels in the property market; this is expected to continue.
Mike Greeff, CEO of Greeff Christies International Real Estate, added that lending institutions “will in all likelihood implement more stringent lending measures”.