Interest rates cut on the back of lower inflation and a rapidly slowing global and local economy
The Reserve Bank’s Monetary Policy Committee (MPC) decided to cut the key monetary policy interest rate – the repo rate – by 50 basis points to 11,5%, mainly on the back of declining domestic inflation and rapidly weakening economic conditions on both the international and local fronts. As a result, commercial banks also lowered their lending rates to the public, i.e. prime and mortgage rates, by 50 basis points to a level of 15,0%.
Although still well outside the inflation target range of 3%-6%, CPIX inflation slowed down to a level of 12,4% year-on-year in October this year, from 13% in September and 13,6% in August. Despite the significantly weaker and more volatile rand exchange since October, which may add to inflationary pressures, inflation is expected to decline further over the next 12 months based on softer food and fuel prices and changes to the inflation basket in early 2009.
On the economic front, global conditions have deteriorated significantly during the past year, with most of the major economies on the brink of, or already officially in recession. In South Africa, real economic growth was extremely low at just 0,2% on a seasonally adjusted annual basis in the third quarter of 2008 compared with the second quarter, largely influenced by weaker global and domestic demand conditions and significantly lower international commodity prices. Apart from the meagre domestic economic growth recorded in the third quarter, a host of indicators published in recent times with regard to various sectors in the economy, including the residential property sector, point to a rapid slowdown over a wide front.
The affordability of housing has been negatively affected by the cumulative 500 basis points in interest rates since June 2006, which caused monthly mortgage repayments to rise by 35,6%. Consumers’ spending power was also severely eroded by sharply rising fuel and food prices over the past two years. Based on the higher interest rates and the ratio of household mortgage debt to disposable income, which was somewhat lower at a level of 47,3% in the third quarter of 2008 (48,2% in the second quarter), the cost of servicing household mortgage debt came to 7,3% of disposable income in the third quarter, unchanged from the second quarter.
Nominal year-on-year (y/y) house price growth was at 0,3% in November 2008 at its lowest level since late 1992, while in real terms, prices were down by more than 10% y/y in October. Nominal house price growth for the full year is forecast at 4% (14,5% in 2007), with a growth rate of less than 3% projected for 2009. In real terms house prices are set to drop by about 7% in 2008, with a further decline expected in 2009.
Against the background of current and expected economic conditions, especially with regard to inflation, interest rates are forecast to be cut further during the course of 2009. However, the outlook for the residential property market towards year-end and into 2009 remains depressed. The market is forecast to bottom around mid-2009 and to gradually recover in the second half of the year on the back of lower inflation and interest rates, only to record a noticeable improvement in 2010.
