Interest rates unchanged after MPC meeting

After a two-day meeting, the South African Reserve Bank's Monetary Policy Committee (MPC) left the key monetary policy interest rate - the repo rate - unchanged at 6,5%. As a result, banks' lending rates to the public, i.e. prime and mortgage rates, are to remain at a level of 10%. Interest rates have been cut by a cumulative 550 basis points since December 2008.

Consumer price inflation is currently below 5% year-on-year (y/y), but factors such as double-digit administered price inflation and wide-spread wage hikes of well above inflation pose some risk to the inflation outlook. No further rate cuts are forecast for the rest of the year, with a rate hike expected by mid-2011 due to inflationary pressures. Mortgage repayments are still about 29% lower compared with late 2008, when the mortgage rate was at a level of 15,5%. However, the household sector remains heavily indebted, with the ratio of household debt to income at 78,4% in the first quarter of 2010, and expected to remain around the 78% level towards the end of the year. The debt ratio is forecast to rise marginally during 2011.

Year-on-year house price growth accelerated markedly in the first half of 2010 after market conditions improved in the second half of last year on the back of a recovery in the economy, low interest rates and banks' less tight lending criteria. However, based on house price trends in the recent past, nominal year-on-year price growth appears to be near an upper turning point (see table below), mainly as a result of the base effects of a resumption in house price growth in the second half of 2009 after prices declined during the first half of the year. These base effects are expected to cause year-on-year house price growth to slow down in the second half of 2010.

After bottoming at 3,6% y/y in November 2009, growth in households' outstanding mortgage balances remained relatively low at around 4% y/y in the first few months of 2010. Household mortgage debt was at a level of 47,8% of disposable income and 61% of total household debt in the first quarter of 2010. Against the background of these trends in household mortgage debt, year-on-year growth in mortgage advances is forecast to remain in single digits in the rest of the year.

*Jacques du Toit is a Senior Property Analyst at Absa Home Loans

Article by: Jacques du Toit -