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No interest rate surprises today

29 Jan 2015

The South African Reserve Bank (SARB) has decided to leave its repo rate unchanged at 5.75%, with prime lending remaining at 9.25%.

Loos says looking ahead to the rest of 2015, the oil price drop has adjusted the inflation outlook radically, and FNB forecast an average CPI inflation rate of 3.5% for the year. "This, in turn, leads us to believe that the SARB will keep rates unchanged through the entire 2015."

John Loos, FNB Home Loans Household and Property Sector Strategist, says the decision comes as no surprise, having been widely anticipated due to Consumer Price (CPI) Inflation declining swiftly back into the 3-6% SARB target range late last year, to measure 5.3% year-on-year by December. "The key contributing factor to the CPI Inflation decline recently has been a sharp drop in global oil prices filtering through into domestic petrol prices, while declining global food prices and a more stable rand of late have also contributed to more subdued local inflation."

Loos says looking ahead to the rest of 2015, the oil price drop has adjusted the inflation outlook radically, and they forecast an average CPI inflation rate of 3.5% for the year. "This, in turn, leads us to believe that the SARB will keep rates unchanged through the entire 2015." 

He says while a cut in rates is not an impossibility this year, their expectations of no cut are based on the SARB’s repeated statements that it sees the need to ultimately “normalise rates” upward, which implies that they are currently “abnormally” low, brought about by an abnormal global and local economic pressure situation back around 2008/9.

"Therefore, we  expect that a good inflation environment such as at the current time would probably elicit an “unchanged decision”, while a negative inflation environment would push the SARB towards hikes," says Loos.

Current interest rate levels should keep the market “sane”, not promoting widespread speculative behaviour, he says. "The unchanged interest rate decision, and the expectation of more sideways movement this year, leads us to expect little in the way of speculative behaviour in the residential market.

"At 9.25%, the prime rate percentage is expected to exceed average house price growth, making the use of cheap credit to profit through short-term capital growth difficult to achieve," says Loos.

He says sideways interest rate movement is expected, however, to contribute to a deterioration in housing affordability. "Our forecast of slightly higher house price growth, under the sideways movement in interest rates scenario, implies a projection of residential affordability deterioration through this year. This is because the average house price is forecast to exceed average employee income growth, thus translating into a rise in the Average House Price/Average Income Ratio."

Seeff chairman, Samuel Seeff says nevertheless prospective buyers should remain cautious and budget carefully, allowing for the possibility of a rate hike. "Buyers should also be mindful that Finance Minister, Nhlanhla Nene, signalled a warning late last year that the 2015 budget, due at the end of February, is likely to include tax hikes," he says.

However, Seeff says that there is still plenty of pent up demand in the market and this, together with the still tight property inventory levels points to a positive outlook for the year. More so, with the added boost of a lower inflation outlook, fuel cost savings and no rate hike for now.

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