09/09/2024
The turning of the repo tide
The question around the repo rate in September is not whether there will be a cut but what that cut will be.
Who says the repo rate will be cut in September? For a start, Nedbank, Standard Bank, Absa, Bloomberg, Bank of America, Investec, the Bureau for Economic Research, Prescient Investment Management … we can go on and on. In the property sector, we’re hearing from all the major national property agencies. Everyone is anticipating a cut and, in fact, demanding it.
This translates into pressure on the SARB’s Monetary Policy Committee (MPC), so if Governor Kganyago doesn’t announce a cut, there will likely be a very strong reaction from all sectors. If he does, however, we have the drop in inflation to thank – from 5.1% in June to 4.6% in July, the lowest it’s been in three years.
There are many reasons to expect the repo rate to lower, but largely due to the Rand firming up with the advent of GNU and a drop in the fuel price. But don’t expect a spectacular rate cut, say many credible analysts. According to most economists, it will likely be 25 basis points, but that does herald in, as per traditional patterns, the expected incremental decreases in the future.
Cause for optimism?
Speaking at REIS, Dr Roelof Botha, an economist affiliated with the Gordon Institute of Business Science (GIBS) and a former advisor to the National Treasury, is somewhat more optimistic, predicting a 50-basis point drop to start, highlighting that New Zealand made that leap, taking many by surprise. The US’s announcement of its anticipated rate cut a day or two before SA’s MPC meets suggests they will follow suit, but the thing is, as Botha points out, neither of these countries has our unemployment problem.
So, just where is Botha’s optimism coming from? He has been vocally critical about the cost of restrictive monetary policy. It may be that the country has been battling high inflation, but at what cost? What is Botha’s question? “The average home price, adjusted by the inflation rate, has dipped over the past two years. This doesn’t mean the property market is dead and buried; it’s just become a little bit tough.”
He also referenced household debt to support the difficulties faced in the property sector: “As a percentage of income, it’s at 9,2%, the highest in 15 years. This is a significant number: R2.1 trillion, 85% of which is mortgage loans, followed by credit cards and overdrafts.
“Total household credit is worth less in real terms than ten years ago. This is frightening. The economy has never been able to grow at high sustained rates unless household credit is growing.”
Consumer price inflation, in July, actually dropped to a three-year low, and inflation itself in the same month was below 4,8%, as revealed in a Bloomberg survey of 16 economists. Goldman Sachs anticipates an average inflation level panning out at 4,5% this year and 3,4% in 2025, which is lower than previous estimates. The same organisation suggests that incremental interest rate cuts will follow September’s, in November and January, and quarterly until inflation reaches 6,5%. Hopefully, the year will end with the prime lending rate at least 11.25%.
Growth and patterns
The prime rate frustrates Botha. He pointed out that from the second quarter of 2022, when SA’s growth was stabilised at 2%, the real prime rate sat at 3%. “The country was exactly where it should be. But, for some reason, after that, the decision was to increase the prime rate … almost every single month.”
Botha, obviously like us all, wants the interest rate to drop … “Very far because then we can grow this economy” and follow his passion, job creation. “We need to create jobs, so this is the only economic policy priority this government should have. The minute you do that, you broaden the tax base and combat poverty. Unemployment is a huge problem. We need to get back to creating at least one million jobs a year in the formal sector from 2025 onward.”
Inflation and job creation are inextricably linked. Together, they are economic indicators that are closely monitored: fewer jobs, less demand for property – more jobs and growth of the economy increases buying power, which equals higher property prices. Everyone wants that, but the balancing act is delicate … growth too fast can lead to higher inflation and interest rates. SA cannot afford to be in a never-ending cycle of financial instability, especially following the growing optimism brought about by the pause in load-shedding. Attention is currently directed towards accelerating economic reforms, especially job creation.
“Now we have the GNU and, along with it, the hope that economic policy will come to fruition,” said Botha. “We have a free enterprise democracy. Our constitution is our barometer of that, and I’m convinced that we are going to have at least 3.4% yield growth in 2025.
“The market is still alive; it’s very tight, though. The minute interest rates start dropping, the property industry will slowly, but surely, start lifting its head and likely face a shortage of houses,” said Botha.
