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Property Talk

Property Talk

Author: Andreas Wassenaar
Date: 2018-09-28

Financial markets and economy

The price of money is something all property professionals should be aware of and constantly watching as it has a significant and direct impact on the property market. The Reserve Bank's Monetary Policy Committee (MPC) consists of seven members who have expertise in the field of economics and monetary policy.

Each of these members has a vote to set interest rates, specifically the "repo" rate or the rate at which commercial banks can access funds from the Reserve Bank at. Because the commercial banks are always indebted to the Reserve Bank the price of this debt is used as a tool by the Reserve Bank to set and influence all interest rates throughout the financial markets and economy.

Currently the repo rate is at 6,5% and at the recent MPC meeting the decision was taken to keep this rate unchanged. However the vote was only marginal as three of the seven members wanted a rate increase and the remaining 4 members voted to keep rates unchanged.

Why is this important for us to know It gives you insight into the likely direction of interest rates going forward. There is upward pressure on rates and this is coming from our depreciating exchange rate, the higher international price of oil and in turn our local inflation rate that is predicted to edge upwards over the short term, despite the recent marginal decline in CPI from 5,1% in July to 4,9% in August 2018.

The Reserve Bank is forecasting that headline CPI should peak at around 5.9% in the second quarter of 2019. Because South Africa is a small open economy, which is very reliant on imported oil, a depreciating currency and increasing cost per barrel of oil immediately impacts on almost every sector of our economy.

Another culprit driving our domestic inflation rate is what they call "administered prices". These are typically municipal property rates charged in the main metro areas, electricity and water charges. A large utility provider such as Eskom has an enormous impact on the economy and almost every business and household.

Very few of us do not consume electricity, and most of us are still paying Eskom for it. Services inflation is driven by wage growth and in particular that of the public sector which at 7% is above inflation. The size of our public sector is significant and therefore impacts on inflation.

The technical recession reported in the media is because of the two consecutive quarters of contracting GDP growth when measured on a quarter-on-quarter basis. Updated figures show that the first quarter showed a contraction of -2,6% and the second quarter -0,7%.

When measured on a year-on-year basis the GDP growth rates were 0,8% and 0,4% across the first and second quarters respectively. The Reserve Bank is now forecasting annual GDP growth of a mere 0,7% for 2018, increasing marginally to 1,9% in 2019 and 2% in 2020.

Household consumption expenditure contracted by 1.3% in the second quarter, declining for the first time in two years. This would be no surprise for restaurant owners and retailers who would be feeling this financial squeeze in their businesses.

What the Governor of the Reserve Bank said in his published MPC statement last week is that their quarterly projection model is indicating five rate hikes of 25 basis points by the end of 2020. If this turns out to be the case it means interest rates could increase from the current prime rate of 10% to 11,25% over the next two years.