What the interest rate cut means for your property

The SA Reserve Bank opted to cut the Repo rate by a further 50bps today to 5.50%. This was in-line with the market consensus, although on Bloomberg, a few analyst surveyed had expected no rate change (STANLIB was looking for rates to be cut by 50bps). The Reserve Bank last adjusted interest rates in September 2010, when they cut rates by 50bps reduction. The prime interest should now fall to 9.0%, which is the lowest prime rate South Africa has experienced since April 1974.

The is the last MPC meeting for the year.

In making the decision to cut rates, the Reserve Bank highlighted the following economic conditions:

  • The outlook for domestic inflation has improved further against the backdrop of a continued negative domestic output gap and sustained strength in the exchange rate of the rand.
  • Persistently low growth in the United States and renewed quantitative easing, combined with renewed concerns about the solvency of some euro area countries, are expected to prolong the current environment of low global interest rates and continued capital flows to emerging market economies.
  • While a number of cost-push factors are beginning to pose some upside risk to domestic inflation, the overall risks to the inflation outlook are assessed to be fairly evenly balanced

According to the Reserve Bank MPC, the lower-than-expected inflation outcomes contributed to a further downward adjustment in the inflation forecast of the Bank throughout the forecast period to the end of 2012. CPI inflation averaged 3.5% in the third quarter of 2010. The Reserve Bank expects a similar average outcome during the fourth quarter of 2010, resulting in an expected average inflation rate of 4.3% for 2010. Inflation is then expected to remain at an average of 4.3% in 2011 and to increase to 4.8% in 2012. In the final quarter of 2012 inflation is expected to average 4.8%, compared with the previous forecast of 5.1%.

In total, the Reserve Bank has now cut rates by 650bps since December 2008, which is very significant in the context of SA interest rate history.

In value terms, using a house value of R1 000 000, and a 20-year mortgage, the 650bps reduction in interest rates since end 2008 would have reduced the home loan repayment by in excess of R4 500 a month. Over the past 18 to 24 months, there has been a very significant downward adjustment to the cost of debt.

There are some upside risk to inflation (mainly wages, some administered prices and international food prices), but these risks remain well contained and the Reserve Bank remains very comfortable that inflation can stay within the target range to the foresable future.

In the MPC statement released today the Reserve Bank clearly indicated that the "scope for further downward movement [in rates] is seen to be limited given the signs of recovery in household consumption expenditure and credit extension".

We currently expect interest rates to remain on hold well into 2011 or early 2012.

*Kevin Lings is an Economist at Stanlib

Article by: Kevin Lings - www.realestateweb.co.za