Interest Rates Stable, While Economy Remains Fragile

As expected, the Monetary Policy Committee (MPC) of the Reserve Bank left interest rates unchanged today. What is of more interest is the view which the Bank is taking of the economic outlook. Our experts gave their thoughts….

Peter Attard Montalto from Nomura:
The door to cuts was closed at the last meeting. The door to hikes has now been opened. We stick with a May 2014 hike baseline but think the chances of January are higher now. The MPC held steady through the Fed dovish surprise last night – keeping rates unchanged at 5.00% as both we and the market expected. The statement shifted, however, from being on the hawkish side of neutral at the July meeting (and at the May meeting on the dovish side of neutral) to this time both the statement and the Q&A being outright hawkish. This is most obvious from the fact that the inflation forecast was revised up not only in the short term but also the long term while the growth forecast remained unchanged. But the general language also shifted on inflation, while on balance it was broadly unchanged around growth.

Dr Andrew Golding of Pam Golding Properties:
The Monetary Policy Committee today took the welcome decision to announce that the repo rate would again remain stable. Our view is that while the housing market continues to show signs of gradual recovery, underpinned by positive sentiment among home buyers, the fact is there are a number of factors impacting on the residential property market, including access to finance. Although the economic recession caused house sales to slow and as a result less new homes to be built during that time, this has now created pent-up demand for homes and we are seeing an increasing take-up of available stock – both in terms of new and existing homes. An increasing trend is that in a number of high demand areas in all the major metropolitan areas of the country (across various price ranges, particularly up to R2 million or R3 million), stock shortages are being experienced. This trend is not necessarily across the board in every area but is being fuelled by desirability of location, access to schools, the workplace and a convenient and appealing way of life. In addition, buyers remain discerning and consider their options until the right property becomes available at the right price, resulting in a market which also remains very value-conscious. Other factors that are impacting on the current market include the fact that, as always, the housing market is very much driven by sentiment. Furthermore, mortgage funding continues to be less accessible than previously and even with interest rates at historical lows, the market has not responded as it would have in the past. Buyers need substantial deposits and are staying in their properties for longer periods of time in order to accumulate equity in their current bonds before looking to relocate – and they need to invest more of their own money in property. Having said that South Africans are gradually becoming accustomed to the new market conditions and new way of purchasing property, which augurs well for a sustained, steady, albeit slow recovery. We remain optimistic regarding the remainder of 2013 and expect that interest rates will remain stable during this period. Nationally and as a group, PGP continues to achieve growth in sales across all regions, as well as in other countries in Africa.

Nedbank’s Economic Unit:
The Reserve Bank’s inflation projections have deteriorated over the next two years, albeit slightly. The Reserve Bank has maintained its growth forecasts, with the output gap remaining large over the forecast period. The MPC’s decision to leave the repo rate unchanged was in line with our and the market’s expectations. The statement remained hawkish on inflation, with the MPC stressing the risks posed by the rand’s weakness and high wage settlements. Regarding the latter, the Governor emphasised their adverse effect on employment growth. Growth is projected to remain below potential over the coming two years. The MPC statement underlined the challenge of balancing weak growth prospects and rising inflation. We therefore maintain our view that this will persuade the Committee to keep monetary policy neutral over an extended period, with interest rates remaining unchanged well into 2014.

Small relief for those in debt is overshadowed by the guarded economic outlook. We saw employment numbers this week showing that jobs are still being shed in the formal economy. While the lack of a rate hike may help the environment for job creation, the expected growth rate for the ZA economy is too low to produce much in the way of new employment.

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