South African property investors wait with bated breath to hear if the South African Reserve Bank (SARB) will reduce interest rates even further this year.
The previous interest rate cut that happened on 20 July 2017 was not anticipated by analysts at the time (24 of 27 economists predicted no cut), however, the rapid deterioration of the growth outlook forced SARB to cut the rate. SARB will be able to cut the prime overdraft rate, as inflation has been moderating at a faster-than-expected rate, thanks to low oil prices and low food price inflation.
“Analysts could be wrong as they were in July, but the fact remains that inflation is down and the long term outlook is good for another interest rate cut,” said Johan van Vuuren, CFO of the IGrow group of companies (IGrow).
“An interest rate cut is always positive news for IGrow investors,” says Gerhardt Jooste, General Manager of New Developments at IGrow. “A decrease in the interest charged on the bonds for their properties means that the properties ultimately end up costing them less in the long run. They also reach the breakeven point in their investments sooner than anticipated and thereafter the properties start making them even more money.”
This week, Statistics South Africa (Stats SA) released a report highlighting some interesting facts. A number of their key findings are suggestive of a possible further interest rate cut:
Consumer Price Index (CPI)
Average annual inflation is expected to fall in 2017 (from the levels it reached in 2016). The target CPI is below 5%, which is a key factor in an interest rate cut.
The headline CPI (for all urban areas) annual inflation rate in July 2017 was 4,6%. This rate was half a percentage point lower than the corresponding annual rate was in June 2017, namely 5,1%. On average, prices increased by 0,3% between June 2017 and July 2017.
The Stats SA report emphasised that inflation is currently in a downward cycle. This suggests that the Monetary Policy Committee (MPC) of the SARB may cut the interest rate.
What follows is an excerpt from the statement by Lesetja Kganyago, Governor of SARB:
The Bank’s forecast for headline CPI inflation has shown a marked improvement since the previous meeting. The annual average forecast has been revised down by 0.4 percentage points in 2017 and 2018, and by 0.3 percentage points in 2019, to 5.3%, 4.9% and 5.2%. A lower turning point of 4.6% is expected in the first quarter of 2018 (previously 5.1%), and an average of 5.2% is forecast for the final quarter of 2019.
The SARB, however, is taking a ‘wait-and-see’ approach to either a rate cut or hike. The SARB said it would remain vigilant and would not hesitate to reverse its decision if inflationary pressures increase or economic risks deteriorate.
The next MPC meeting is scheduled for 21 September 2017 (with the last meeting of the year planned for 23 November 2017). An interest rate cut could be announced after either one of these meetings.