Bad news as Interest rate goes up
The South African Reserve Bank’s (SARB) Monetary Policy Committee (MPC) on Thursday increased the repo rate by 25 basis points to 6.25%, in a move Governor Lesetja Kganyago citing concerns over a weak rand and rising inflation.
This was despite the 2016 consumer price index CPI forecast being downgraded to 6% from the previous forecast of 6.2%.
The announcement, will see Commercial Banks raise their Prime rates to 9.75%. It also means that a homeowner with a 20-year housing loan of around R1 million will now see their monthly repayment increase from about R9 787 to R9 959.
For the booming commercial property sector, the latest interest rate hike is something of a disappointment, says Ortneil Kutama, SA Commercial Prop News Media Director.
"A high interest rate environment dampens corporate activity in the listed property market, as it leads to higher yields in the sector, which in turn widens the yield gap between directly held property and listed property." he said.
SARB Governor Lesetja Kganyago said risks to the forecast have increased to the downside, mainly due to worsening drought, the marked depreciation of the rand and the possibility of increased electricity tariffs.
"Delaying the adjustment further could lead to second round effects and require an even stronger monetary policy response in the future with more severe consequences for short term growth," said Kganyago.
It was the last MPC meeting for the year and follows a 25 basis point increase in July.
The increase could push food inflation as high as 10% with catastrophic results for deeply indebted South Africans.
Jacques Du Toit, senior economist at Absa said the announcement came against the background of expected inflationary pressures due to the lagged effect of the severe drought on food prices, a weakening rand exchange rate and the prospect of rising interest rates in the United States before year-end and during next year.
GDP
Domestic economic growth remains subdued, but further contraction in 2015 Q4 is not expected. The GDP forecast was revised down to 1.4% for 2015 and 1.5% for 2016, but unchanged at 2.1% for 2017.
The outlook for the construction sector is constrained – as indicated by declines in new building plans passed.
The unemployed rate was up to 25.5% in Q3.
Retail sales were up by 2.7% year-on-year in September (up 4% in August). Month-on-month sales were down by 1.9%.
Rand
The rand/dollar exchange rate has been volatile, with domestic impacts.
The rand has appreciated 1% versus the euro, depreciated 3% versus the dollar and 1.5% on a trade-weighted basis, since the previous MPC meeting.
A high degree of volatility and overshooting of exchange rate may be expected in the lead up to the US Federal Reserve increasing rates.
The rand was trading at R14.1907/$ from a previous close of R14.1673/$ and R14.1881/$ before the announcement.
Inflation
Headline consumer inflation was up by 4.7% year-on-year in October (4.6% in September and August). Month-on-month prices were up by 0.3%.
Inflation is expected to average 4.6% in 2015, 6% in 2016 and 5.8% in 2017. The forecast for 2017 follows a slow downward trend, with inflation expected to average 5.7% in 2017 Q4.
Changes in the forecast were due to a lower starting point, the lower oil price and the adjustment to education fees.
Core inflation was down by 5.2% year-on-year in October (5.3% in September) and fell by 0.2% month-on-month from 0.4%.
The forecast for core inflation is marginally higher, expected to average 5.5% in 2016 and 5.4% in 2017.
He said break-even inflation rates remain at the upper end of the target range.
“We have been pleasantly surprised by the pass-through we have seen,” Kganyago added at a news conference, following the announcement.
Producer price inflation (PPI) increased from 3.4% to 3.6% in September with the main pressure from food, beverage and tobacco products. Food and agricultural products are to sustain an upward trend in PPI in coming months.