Interest rates: Good news, bad news as first MPC meeting looms

Written by

SOUTH Africans will continue feeling the pinch this month - and for the foreseeable future, as interest rates are not yet expected to come down.

The best we can hope for is a repo rate hold which will keep the prime lending rate stable at 11.75 percent.

The good news, though, is that this is the bad news. A rate hike would be worse.

While the repo rate will probably not increase following the Monetary Policy Committee’s (MPC) meeting at the end of January, High Street Auctions director Greg Dart says South Africans aren’t likely to feel any reprieve either. However, the outlook for local and global inflation is better than it has been for some time and so he is optimistic that we could see a rate cut in March, or perhaps in the second quarter of this year (Q2).

“South Africa – like most countries – tends to follow the US Central Bank and economists there are predicting the first rate cut to come at the end of Q1. Hopefully, we’ll be close behind.”

Lew Geffen Sotheby’s International Realty chief executive Yael Geffen agrees that the MPC will likely leave the repo rate unchanged at its first meeting of the new year.

“The good news is there probably won’t be an increase. The bad news is the prime lending rate is probably only going to ease slightly at the end of the first quarter, or in the second quarter of the year.

“We need interest rates to come down to reinvigorate the residential property sector.”

Citing Lightstone data released in December, she says 2023 saw almost 100,000 fewer residential property transfers than 2022, with the value of trading in the sector shrinking by nearly R90 billion year-on-year.

“Consumers’ belts are as tight as they can get. People simply can’t afford to get onto the property ladder at current interest rates, coupled with the horrendously high cost of living in general.

“We need far more vigorous action from government this year to cut costs and get the economy moving in the right direction again.”

Geffen adds, however, that the MPC’s decisions are based on our country’s standing in the global economy, so when the rate goes up, we can’t blame the Committee for reacting to the situation the country is in. But we can demand that the government starts acting in the interests of its citizens, putting policies in place that will lead to lower rates.”

Following a challenging 2023, Samuel Seeff, chairman of the Seeff Property Group, says the economy and property market are in dire need of a positive injection. Thus, a 0.25 percent rate cut to kick off the 2024-year would be a “vital boost”. And he believes that the South African Reserve Bank (SARB) has the room to do it considering inflation came down towards the end of last year to within the Bank’s target range of 3.0 percent to 6.0 percent. The US Fed and other central banks have also signalled intention to start cutting rates quite soon this year.

At the very least, the SARB should keep the rate unchanged and hopefully indicate that a rate cutting cycle will kick off soon.

“2024 is an important election year for South Africa, and in fact for many other countries including the USA. Our sense is that the property buyer’s market conditions will largely stay for this year, and a rate cut will further boost that,” he says.

FNB also expects the repo rate to remain unchanged at 8.25 percent, meaning the prime lending rate will hold firm at 11.75 percent. In fact, it believes the rate hiking cycle has come to an end.

Having said this, the bank’s senior economist Koketso Mano does not expect the cutting cycle to start just yet.

“We think the MPC still requires more evidence that inflation will anchor at the 4.5 percent target within the policy horizon. Unfortunately, heightened geopolitical tensions, biosecurity as well as adverse weather patterns complicate the deceleration trend in inflation and could prolong the lift in inflation expectations away from target.

“In addition, this year’s elections, and any further fiscal slippage not only risk a weaker rand and further inflationary pressure but would worsen the risk premium required to invest in South Africa, which automatically lifts the estimate on the rate of interest that neither supports nor restricts economic activity (neutral).”

Therefore, he says the MPC is likely to wait at least until the event risk of the elections has passed.

FNB’s view is that the first cut could be in the second half of this year, depending on inflation and policy decisions taken by advanced economies.

While a cut in the repo rate this month would be good news for homeowners, Bradd Bendall, BetterBond’s head of sales, says conflict in the Middle East and related threats in the Red Sea to international shipping and world trade are creating new and immediate economic risk factors. Global inflationary pressures from 2023 are also still present.

“And we face muted local economic growth. So, it’s probable that the MPC will be circumspect when it meets for the first time this year.”

He adds: “We know that the SA Reserve Bank historically follows the lead of the US Federal Reserve, which has indicated it plans to hold rates steady until July when US inflation is expected to stabilise. In both countries, elections could have an impact on economies, but only time will tell as these national narratives are yet to unfold.”

On a positive note, BetterBond does not foresee a repo rate hike this month, or in the near future.

“Depending on inflation, our industry hopes to see positive moves on interest rates starting to come down, towards the middle and second half of the year.”

Paul Stevens, chief executive of Just Property, expects interest rates to be kept on hold until mid-year. Even though inflation dropped to 5.5 percent in November – which was below the high of 5.9 percent in October, he expects high inflation figures. Thus, the SARB will pause with a potential rate reduction until it sees inflation continue to move downward.

“There are expectations that inflation during the course of this year will drop to 5.0 percent and even further in 2025, which gives the SARB comfort in moving interest rates lower.”