Consumer Barometer – SARB interest rate decision

The South African Reserve Bank’s (SARB) Monetary Policy Committee (MPC) decided today to leave its policy Repo Rate unchanged at 6.75% after only 1 x 25 basis point cut this year to date.

This will mean Prime Rate remaining at 10.25%.

A rate cut could have been justified by CPI (Consumer Price Index) inflation being well-within the SARB’s 3-6% target range, having recorded an August year-on-year growth rate of 4.8%. The alleviation of the nationwide drought earlier in 2017, and a resultant drop in food price inflation, has been a key factor in lowering CPI inflation to within the target range, while a reasonably well-behaved Rand since the late-2015 Nenegate shock has contained imported price inflation.

But the SARB does concern itself with the risks, and Rand risks (always a potential source of imported price inflation) in the form of political volatility and potential ratings downgrades did feature in the MPC statement.

Potential impact on the Household Sector/Consumer and Housing Market – likely to keep the consumer pushing to take a more conservative financial approach.

  • FNB is of the opinion that the unchanged interest rate decision will keep consumer confidence in the doldrums, not only driven by the Household Sector’s financial weakness but also by significant concerns regarding South Africa’s economic future, in light of a raft of negative economic news through 2017, from widely publicized ratings downgrades to a recent technical recession.

This is expected to keep the Household Sector moving towards a more cautious financial approach, including further expected decline in the Household Debt-to-Disposable Income Ratio (which has already declined from 87.8% in early-2008 to 72.6% by the 2nd quarter of 2017) in the near term, possibly to below 70%. In addition, FNB expects further increase in the country’s dismal Net Savings Rate.

  • Given the unchanged rate decision, FNB expects average house price growth to remain in lower single-digit territory in the near term (our August FNB House Price Index having measured 4% year-on-year growth).
  • The FNB “Alternative Real Prime Rate”, which measures the difference between the Prime Rate percentage and year-on-year house price inflation, will remain firmly in positive territory, having measured a very significant +6.21% in the month of August. This means that the housing market remains “light years” away from becoming an unhealthy “speculators paradise” (where speculators can use cheap credit to achieve quick profits when price inflation far outstrips the mortgage lending rate percentage as it did back around 2004).

It also is highly unlikely to encourage any thoughts of “over-exuberant” investor behavior, give the weak state of house price growth.

No further cost Saving on a 20 -year Bond following July’s lone rate cut to date

To date, the 1 x 25 basis point Repo Rate cut of July has only given a small cost saving. A monthly instalment on a R1 million 20-year home loan at Prime Rate has declined from R9,984/month at 10.5% Prime Rate to R9,816/month at 10.25% Prime Rate, where it will currently remain. This is a saving of only R167/month so far in the current rate cutting cycle. Please note that these instalment calculations are indicative only, and actual instalments can differ slightly depending on how a lender compounds interest.

Read more here: Consumer Barometer – September 2017