Expect more rate hikes - experts
The 25 basis point rates hike by the SA Reserve Bank (Sarb) on Thursday was based on a continued set of fears about the upside risks to inflation and expectations, wages and the rand, explained Peter Attard Montalto of Nomura on Thursday.
He had predicted that the Sarb will hike rates by 25bp.
He described the statement by Sarb governor Lesetja Kganyago as remaining very hawkish, although "with an interesting note at the end on the dependency of the next moves".
Montalto, therefore, expects the next move to be a 25bp in November, but an earlier and possibly even larger move is possible in September, depending on cross-border flows, the Fed and the rand.
"The hike today is, we should remember, part of a much larger hiking cycle to normalise real policy rates over time – and there were many key parts of today’s MPC statement and questions and answers to confirm the broad framework the Sarb is operating within," said Montalto.
"At its most basic the MPC confirmed that it hiked rates to manage the possibility of second-round effects from the myriad of risks it sees present or developing around CPI, and thus to keep inflation expectations more anchored after recent mild deterioration."
Jacques du Tot, property analyst at Absa, said interest rate movements are expected to remain largely data dependent over the next 12 to 18 months, impacted by developments on the macroeconomic front, inflation expectations and trends in the factors driving inflation.
"Further rate hikes are expected towards year-end and in 2016 on the back of mounting inflationary pressures," he said.
"Rising interest rates will drive debt repayments and debt-service costs to higher levels, affecting household and business finances, consumer and business confidence, the demand for and affordability of credit, and consumption expenditure and fixed investment."
Sizwe Nxedlana, chief economist at FNB said the outlook for inflation has deteriorated in recent months. This is mainly due to a combination of a higher rand oil price compared to the beginning of the year, higher maize prices placing upward pressure on food inflation and high increases in administered prices such as utilities.
"We expect inflation to increase from its current level of 4.6% to above 7% in the first quarter of 2016. Furthermore, as a small open economy with a large current account deficit, rising US interest rates are likely to place the rand under pressure and by implication place upward risk on domestic inflation," he said.
"The Sarb has, in previous statements, signaled its concern about this deterioration in the inflation outlook. As a result, the 25 basis point interest rate hike comes as no surprise."
He expects more interest rate increases over the next 18 months. However, we expect the magnitude of the current hiking cycle to be a lot less than previous hiking cycles given the fact that it occurs in an environment of very weak economic growth.”
Gary Palmer, CEO of Paragon Lending Solutions, said that banks are now more than ever before likely to continue to implement stricter lending regulations.
“An interest rate hike has been on the cards for a long time, especially with inflation increasing fuelled by petrol and food price hikes and the devaluing of the rand, which may reduce business confidence further. As such, all indications are that consumers will battle with the price hikes and consequently default on loan payments and lead to banks tightening their lending restrictions once again,” he said.
Lew Geffen, chair of Lew Geffen Sotheby’s International Realty, said the latest increase would not be that serious if the Government had not recently also raised transfer duties by an average of 5.65%, making the cost of purchasing property that much more expensive for average South Africans – most of whom require financing to buy homes.
“The current slowing of the property market will be exacerbated by this interest rate hike and further hurt the economy, which is already taking massive strain from transport, energy and food price increases, not to mention severe negative business sentiment about the overall economic outlook for the country," said Geffen.
"However, there’s a shortage of stock, demand is high, but sellers should be cognisant of the prevailing market factors.”
Adrian Goslett, regional director and CEO of RE/MAX of Southern Africa, said that a hike in the interest rate right now would only serve to place further pressure on consumers who are already feeling the brunt of the increased cost of living.
Goslett said that a rate hike will however impact consumers and sectors that are directly affected by the interest rate such as the property market, which will add to the weakening of the economic growth.
He urged homeowners and potential buyers to continue focusing on paying down their debt and building up their savings.
"Future rate hikes will impact on affordability levels and aspirant homeowners will need to be prepared for that," he said.
Bond originator ooba said the rates increase could negatively impact the residential housing market.
“Many consumers are already dealing with elevated levels of debt and the rising cost of living expenses. The repayment on a R1m home loan over a 20 year period will now cost the homeowner an additional R163 per month, which adds up to an extra R1956 per year.Housing affordability will therefore become more constrained for prospective homebuyers as a result of this latest rate increase,” said Kay Geldenhuys, ooba’s property finance processing manager.
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