US home-loan crisis might halt Mboweni

Experts say SA Reserve Bank could even drop interest rates next week .

Local households may be spared another 0.5 percent interest rate increase next week, thanks to the US sub-prime crisis, First National Bank’s property strategist John Loos argues in an economic report.

Reserve Bank governor Tito Mboweni is due to make an announcement on interest rates next Thursday.

Loos said: “The FNB house view has been one more 50 basis point interest rate hike, and thereafter a prolonged period of sideways movement.”

But the forecast is now less certain because the US central bank has cut interest rates, effectively abandoning its fight against inflation to help cash-strapped American banks survive their reckless home lending.

“Our economics team has acknowledged the possibility that a 50 basis point rate hike is not a ‘given’, and that the Reserve Bank may even cut rates sooner than previously expected,” Loos said.

“The US rate cuts have helped weaken the dollar, thereby strengthening the rand, which eases our inflation because it makes imported oil and other goods cheaper.

“A slowdown in global economic growth also puts the brakes on inflation, lessening the need for another interest rate increase.”

Loos doesn’t believe “direct contagion” from US housing market woes is likely.

“Large global funds don’t really play in the South African residential space, so there can be no talk of fallout from large investors who may decide to lower their exposure to residential property globally.

“In addition, individual foreign investors in South Africa are still a small group despite local paranoia over inflation, lessening the need for another rate increase.”

Local house price growth has slowed, but it has not fallen as low as in the US. Falling house prices are a key factor in the US banking crisis because lenders are unable to recoup loans by selling the underlying asset.

South African banks tend to keep home loans on their balance sheet, unlike their US counterparts, which sell them on as bonds.

Loos said: “A potentially larger impact is related to the much- talked about equity withdrawal issue. It is believed by some that US households lowered their savings rates deliberately due to their balance sheet strengthening as housing values appreciated through the boom years. If this theory is correct, it could mean that US households start to save more as housing values decline in what is described as reverse equity withdrawal.

“This increased savings could dent consumer spending, and the US runs on its consumer as do many foreign exporters of consumer good to the US.”

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