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Property Talk

Property Talk

Author: Andreas Wassenaar
Date: 2015-04-03
Following last week's meeting of the Reserve Bank's Monetary Policy Committee, the Governor, Mr. Lesetja Kyanyayo, published their detailed statement, which provides an excellent macro-economic overview of how they see the current state of our economy and their expectations for the next year. The decision was made to leave the key policy repo rate unchanged at 5.25%. The immediate result is that all South African banks leave their prime rate at which they lend money to the public unchanged at its current 9,25%. For property practitioners and holders of mortgage bonds this is good news as the trend remains for an upward movement of interest rates. Unchanged interest rates therefore leave us, for now, in a relatively low interest rate environment. Our headline CPI measure of inflation declined from 4.4% in January to 3,9% in February 2015. Producer Price Inflation (PPI) is currently measured at 2.6%. This is the measure of the growth in prices of goods leaving the "factory" door. It is the lowest the measure of PPI has been for over five years. Although good news for CPI inflation, as producer prices work their way into consumer prices, it indicates very subdued demand for manufactured goods.

From the Reserve Bank's statement we can see that there are four important aspects that the monetary policy committee see impacting on our inflation rate. These are US monetary policy, the international oil price, the state of our domestic economy and the Rand: US Dollar exchange rate.

The risk of the US increasing its domestic interest rates to a small developing country such as South Africa is that the capital markets will react by moving funds away from our interest bearing bonds to US interest bearing bonds. The effect is to suck capital away from the debt instruments of developing countries to the US debt, which is considered a safer haven.

This directly impacts on our exchange rate and therefore our local inflation rate. If our Reserve Bank then decides to increase interest rates the implications to our domestic economic growth potential is therefore immediate and directThe price of oil has recovered somewhat from its low of US$45 per barrel in January, then increased to US$62 per barrel in February and is currently around US$57 per barrel.

With the higher oil price, a weaker Rand against the US Dollar and the pending introduction of the new fuel levy, our fuel prices are set to increase again and we would have reversed a large part of the favourable impact on domestic fuel prices. Our petrol prices declined about R4 per litre between August 2014 and February 2015. It seems like this is over for now.

Our local economic growth prospects according to the Reserve Bank are predicted to be 2,2% in 2015 and only 2,3% for 2016. These have been revised downwards over the past 6 months. Eskom's capacity is currently considered a significant constraint on our domestic economic growth.

The Rand: US Dollar exchange rate has been volatile and has traded within a range between R11.27 and R12.52 over the past few months. I often think of the exchange rate as the share price of the country. It reflects the future outlook of the performance of the country, the desirability of the country as a long-term investment destination and our attractiveness to attract short-term capital looking for higher yielding assets.

For further information and an interactive analysis of this article follow my blog: andreaswassenaar.blogspot.com.