The time has now arrived for an interest-rate cut. It cannot be delayed any longer. The higher than necessary rate is hampering growth in the economy and property market, which is causing more damage than good.
Source: 123RF.
This is the message of Samuel Seeff, chairman of the Seeff Property Group, speaking ahead of this week’s meeting of the Monetary Policy Committee (MPC) of the Reserve Bank this Thursday.
"While the South African economy desperately needs a 50bps cut, we should, at the very least, see a 25bps rate relief from the Reserve Bank this week," Seeff said.
"It is almost unthinkable that the Bank would remain tone deaf to the plight of the economy and consumers."
In South Africa, the repo rate (the interest rate at which a country’s central bank lends money to commercial banks) is at its highest level since the spikes of 2002 and 2008, with the current real repo rate 3.65% above inflation.
This is according to Albert Botha, head of fixed income at Ashburton Investments.
"This real rate exceeds the 2008 peak and is the highest since 2006. Over the last 20 years, the average real repo rate was 1.16%," he said.
If South Africa does go ahead with a rate cut, it will be the first time it does so since the Covid-19 response.
Time for relief
Seeff noted that there are more than adequate reasons for the Reserve Bank to provide an interest-rate relief to benefit consumers, the economy and property market.
"The rand has strengthened since the last meeting of the MPC, and is now trading slightly below 17.7 to the US dollar. Inflation too has hit a three-year low (4.6% in July from 5.1% in June), and is expected to come down further to within the Reserve Bank’s target range.
"Moreover, the economic outlook has improved visibly, and we are seeing the benefits of the Government of National Unity (GNU) in aspects such as billions of rand flowing into South African bonds, while the JSE has hit record highs over the last month.
"The uninterrupted energy supply will further benefit the economy. Economic indicators have also improved with aspects such as the falling oil price leading to petrol-price cuts which further benefits consumers and the economy."
Furthermore, the leading central banks have cut their rates in recent months including the Bank of England, and the European Central Bank, Seeff said.
Positive market outlook
Meanwhile, John Herbst, chief executive officer of Fine & Country Sub-Sahara Africa (SSA), remarked that the outlook for the real estate market is becoming increasingly positive.
"The Consumer Price Index (CPI) has remained comfortably within the Sarb's target range of 3% to 6% for 14 consecutive months, reinforcing expectations of a reduction in borrowing costs," he said.
Herbst added that this development is likely to invigorate the property market, particularly in inland metropolitan areas, particularly in the wake of
significant value erosion in the property market and the economy as a whole.
"As a result of the high interest rate, transaction volumes have declined by nearly 40% since 2020/2021, and are effectively now down to levels last seen in 2010, according to Lightstone," Seeff added.
"First-time homebuyers are struggling to get into the market while middle-class homeowners have had to absorb additional monthly bond repayments of up to R1,500 to R3,000 more per month in addition to the higher cost of living and other credit commitments."
Botha concurred: "These changes will impact various sectors of the economy. For most people, this will provide welcome relief on home loans, credit cards and other debt.
"New homeowners can expect monthly payments to drop between R750 to R775 per R1m loan size with the first 1% worth of cuts, while those with about 10 years left on their loans will see a reduction of R620 to R650 per R1m outstanding."
Herbst noted, “As interest rates drop, we expect a surge in market activity, which could lead to a boost in property values. This is welcome news for homeowners and investors alike, particularly after a period of subdued growth.
"While the market has faced challenges in recent months, including inflationary pressures and external factors, the likely reduction in interest rates is set to create a more favourable environment for buyers and sellers.
"We believe this will benefit the residential market, especially in the premium sector, where recovery has been eagerly awaited."
