September’s MPC (Monetary Policy Committee) decision to keep interest rates unchanged (repo rate at 6.75%) has surprised many. The forecasts and consensus was that there would be a 25 basis point cut. What exactly do the MPC consider when making interest rate decisions and how will the latest stance affect things?
Contrary to popular belief, the members of the committee do not meet up, deliberate and then cast a vote on whether or not to change the repo rate (the rate at which the private (sector) banks borrow from the South African Reserve Bank). In fact, preparation for all scheduled meetings begins a month prior, when inflation forecasting is analysed and econometric models are scrutinised. Consultation and research is conducted and various factors are considered before a decision is reached. According to the South African Reserve Bank’s (SARB’s) website, the MPC considers various factors that influence inflation when considering a rate change, and these include:
- changes in administered prices;
- changes in wages, productivity and unit labour cost;
- components of domestic and external demand;
- exchange rate developments;
- money supply and credit extension;
- oil prices; and the expected output gap (the gap between actual and potential output)
What the market expected the MPC to do on Thursday
The SARB’s current inflation target is between 3% and 6% and considering that CPI in August came in at 4.8%, the inflation box had been ticked. Investec economist Kamilla Kaplan has forecasted that consumer inflation will remain well within target, and would even fall to as low as 4.3% by the end of the year.
In July, the Reserve Bank surprised some with their 25 basis point rate cut - the first in five years - and it signalled to many that a new rate-cutting cycle had begun. The July move, according to Old Mutual Investment Group’s senior economist Johann Els, suggested the SARB had entered into and would "remain in a mild interest rate cutting cycle". Weak economic growth in South Africa (despite an uplifting second quarter) created a need for the rate cut, and that need translated into further expectations of another cut on Thursday.
This view was shared by Craig Lemboe of the Bureau for Economic Research (BER) at the University of Stellenbosch. Speaking a week ahead of the decision, he felt that the MPC would settle on a 25 basis point cut, the same expectation voiced by Investec’s Kaplan.
Even the markets were factoring in a rate cut, with bonds trading weaker and the rand softening against all the majors leading up to the televised decision.
Why then the decision not to cut?
The markets got it wrong, the majority of analysts and economists also got it wrong, but the vote was ever-so close. The committee was in fact locked at 3 votes for a cut and 3 votes for unchanged, which then required the MPC chair to make the deciding call.
FNB CEO Jacques Celliers was one of the voices that came out in support of the decision, suggesting that it was well-reasoned, citing the recent rand weakness as an example of volatility stemming from events "beyond our control".
He added that by leaving rates unchanged, the SARB was "enabling additional stability at a time when many domestic political and policy issues remain unresolved".
Reserve Bank governor, Lesetja Kganyago outlined some of the thinking by the committee, referring to South Africa’s political risks‚ expected increases in electricity costs and the possibility of further credit rating downgrades in November, as reasons to keep the repo rate unchanged.
He also added that while inflation was expected to stay within the prescribed target levels over the next 24 months, the stance of the SARB was a cautious one, given the many pressures affecting the economy currently.
On the political risk front, two other events effectively sandwiching the rating agency reviews, include October’s mini-budget and December’s much talked about ANC elective conference.
A missed opportunity and its possible property repercussions
Given the number and timing of major events still to come this year, a November decision to cut rates may be too risky, and therefore chances of a rate cut in 2018 are more likely than at the next committee meeting.
And so September may have been the last opportunity to cut rates for the year, something that would no doubt have brought about a shriek of delight from South African citizens as bond and debt repayments drop, freeing up more disposal income and in turn boosting the economy.
Unfortunately the reality is that "the potential impact of the latest Monetary Policy Committee (MPC) decision on the consumer and housing market will likely be a push to take a more conservative financial approach,” according to John Loos, Household and Property Sector Specialist at FNB. This hit on already low consumer confidence could very well mean that house price growth will stay in the low single digits, much like the 4% year-on-year figure recorded in August’s FNB House Price Index.
Chairman of the Seeff Property Group, Samuel Seeff said "At a time of poor business confidence and weak economic growth marred by political instability, a further rate cut would have been an important boost for consumers and the market. Seeff indicated that weak economic fundamentals were having an impact and that “properties are taking longer to sell and buyers are hesitant."
Andrew Golding, chief executive of the Pam Golding Property Group, agreed. He feels that the local housing market would have got a much needed boost had the repo rate been cut. A 25 basis point reduction in his mind, "would have prompted many home buyers who are currently sitting on the fence to commit to purchase decisions."
Mike Greeff, CEO of Greeff Christies International Real Estate saw the positive in maintaining the current repo rate, pointing out that while a drop would have been "very welcome", keeping the rate unchanged sends a strong message of stability to the market, and this is very important in the current economic climate."
As a general comment, Greeff also said that "We’re seeing a stock shortage, as well as a slight levelling off of house selling price growth, but demand is still high in the Western Cape and unlikely to drop, which means property values will continue to grow.”
Fin24 - Carin Smith - Mixed reaction from real estate industry to SARB decision
Fin24 - Carin Smith - Unchanged rates won’t lift consumer confidence - experts
Eye Witness News - Ray White - SARB TAKING CAUTIOUS APPROACH TO REPO RATE - KGANYAGO
Business Day - Reitumetse Pitso - Bonds slightly firmer after interest rate announcement
Fin24 - Jan Cronje - Economists’ surprised reaction at SARB rates decision
Fin24 - Carin Smith - Another interest rate drop could be on cards - economist
Business Day - Hillary Joffe - Interest rate cut may be on the cards
South African Reserve Bank
Investment Specialist at Discovery Invest
Mark graduated with a Business Science Degree from the University of Cape Town in 2007. He then joined Sharenet, during which time he also completed his B.Com Honours through UNISA. Mark has helped to build, launch and manage derivative and share trading brokerage businesses. He is also a JSE Registered Securities Trader, and has worked on the trading desk at Sharenet. After seven-and-a-half years at Sharenet Mark then moved to Reitway Global (a specialist Global Listed Property Fund Manager) where his passion for property was further kindled. Mark currently works for Discovery Invest as an Investment Specialist on their Investec Managed fund offering. He has over nine years of experience in the equity and asset management sector and can be reached at: email@example.com