John Loos comments on the unchanged Repo Rate

Posted On Thursday, 21 September 2017 22:22 Published by
Rate this item
(0 votes)

SARB leaves Repo Rate unchanged after only 1 x 25 basis point cut in the current cutting cycle. Weak consumer confidence likely to remain, and shift to a more cautious consumer expected to continue says John Loos, Household and Property Sector Strategist.

John_LoosFNB

Weak consumer confidence likely to remain, and shift to a more cautious consumer expected to continue.

The South African Reserve Bank’s (SARB) Monetary Policy Committee (MPC) decided today to leave its policy Repo Rate unchanged at 6.75% after only 1 x 25 basis point cut this year to date.

This will mean Prime Rate remaining at 10.25%.

A rate cut could have been justified by CPI (Consumer Price Index) inflation being well-within the SARB’s 3-6% target range, having recorded an August year-on-year growth rate of 4.8%. The alleviation of the nationwide drought earlier in 2017, and a resultant drop in food price inflation, has been a key factor in lowering CPI inflation to within the target range, while a reasonably well-behaved Rand since the late-2015 Nenegate shock has contained imported price inflation.

But the SARB does concern itself with the risks, and Rand risks (always a potential source of imported price inflation) in the form of political volatility and potential ratings downgrades did feature in the MPC statement.

Potential impact on the Household Sector/Consumer and Housing Market – likely to keep the consumer pushing to take a more conservative financial approach.

• We are of the opinion that the unchanged interest rate decision will keep consumer confidence in the doldrums, not only driven by the Household Sector’s financial weakness but also by significant concerns regarding South Africa’s economic future, in light of a raft of negative economic news through 2017, from widely publicized ratings downgrades to a recent technical recession.

This is expected to keep the Household Sector moving towards a more cautious financial approach, including further expected decline in the Household Debt-to-Disposable Income Ratio (which has already declined from 87.8% in early-2008 to 72.6% by the 2nd quarter of 2017) in the near term, possibly to below 70%. In addition, we do expect further increase in the country’s dismal Net Savings Rate.

• Given the unchanged rate decision, we also expect average house price growth to remain in lower single-digit territory in the near term (our August FNB House Price Index having measured 4% year-on-year growth)

• Our FNB “Alternative Real Prime Rate”, which measures the difference between the Prime Rate percentage and year-on-year house price inflation, will remain firmly in positive territory, having measured a very significant +6.21% in the month of August. This means that the housing market remains “light years” away from becoming an unhealthy “speculators paradise” (where speculators can use cheap credit to achieve quick profits when price inflation far outstrips the mortgage lending rate percentage as it did back around 2004).

It also is highly unlikely to encourage any thoughts of “over-exuberant” investor behavior, give the weak state of house price growth.

No further cost Saving on a 20 -year Bond following July’s lone rate cut to date.

To date, the 1 x 25 basis point Repo Rate cut of July has only given a small cost saving. A monthly instalment on a R1 million 20-year home loan at Prime Rate has declined from R9,984/month at 10.5% Prime Rate to R9,816/month at 10.25% Prime Rate, where it will currently remain. This is a saving of only R167/month so far in the current rate cutting cycle. Please note that these instalment calculations are indicative only, and actual instalments can differ slightly depending on how a lender compounds interest.

Last modified on Friday, 22 September 2017 06:12

Most Popular

Government changes shake up the Sub-Saharan African construction sector

Aug 27, 2018
SIMON HERD
Mace has released its latest tender cost update for Sub-Saharan Africa, showing mixed…

Africrest Properties aims to be one of the largest residential landlords in Johannesburg

Aug 29, 2018
KENT ST.APARTMENTS INTERIO
Africrest Properties intends to be one of the top 10 largest residential middle-income…

Wanderers Golf Club and Investec Property join forces to develop unique R2 billion mixed-use precinct in Illovo

Sep 03, 2018
WCG-HIGH-RES
The Wanderers Golf Club, in partnership with Investec Property has embarked on a process…

Liberty Two Degrees bolsters its asset management team

Aug 27, 2018
Amelia Beattie
Liberty Two Degrees (“L2D”), a premier South African retail focused REIT, has recently…

Ntshongweni Urban Development's phase one gets the go ahead

Sep 12, 2018
NTSHONGWENI URBAN&RETAIL CORE
With all development rights in place, civil construction on the much awaited Ntshongweni…

Please publish modules in offcanvas position.