Bugle Sales Talk Editorial

Author: Andreas Wassenaar
Date: 2015-05-29

Last Thursday the South African Reserve Bank's Monetary Policy Committee held their bi-monthly meeting to assess the macro-economic environment and make a decision on what to do with interest rates. The instrument of influence the Reserve Bank wields is the repo rate - the rate at which commercial banks are able to borrow money from the Reserve Bank, to whom they are always indebted. An administered change in the repo rate by the Reserve Bank therefore immediately permeates all the interest rates charged by commercial banks as they increase rates charged to you and I to compensate for an increase in the rate that they pay. Currently the repo rate is 5,75% and the decision was taken to leave rates unchanged for now, even though two members of the six member monetary committee voted in favour of a 0,25% increase in the rate.

If you are a property owner or professional in the industry, keeping a watchful eye on the outcome and published monetary policy statements following their monetary policy committee meetings is very useful as it will provide you with advance warning of changes on the horizon. The primary mandate of the Reserve Bank's monetary policy is to achieve price stability. The targets are therefore set in terms of a Consumer Price Inflation (CPI) target range of between 3% to 6%. Currently CPI measures 4,5% - safely within the target range, but there are many macro-economic factors that are pointing towards CPI increasing over the next two quarters and it is in anticipation of these that the monetary policy committee members would be already thinking in terms of increasing interest rates.

The big factor that they are watching so carefully is American monetary policy decisions. The expectation is that sooner or later the US will have to start increasing interest rates. Higher Dollar based interest rates is expected to cause money to flow away from Rand denominated investments to the considered safer havens of Dollar denominated investments The impact implies a depreciating Rand and upward pressure on our domestic CPI. The Reserve Bank has already forecast that our CPI rate is expected to average 4,9% for 2015 and then to peak at 6,8% in the first quarter of 2016 and decline to 6% by the second quarter of 2016. So what is happening on the international economic scene? The US economy is expected to grow by 3% in 2015 (incredible when you consider its size and that we are expected to produce growth of only 2,1% in 2015), the Eurozone by 1,5% and Japan by just under 1%. Brazil and Russia are experiencing negative growth of -0.9% and -1,4%. China experienced first quarter growth of 5,3% and is expected to grow by 6,9% for 2015. India is actually expected to lead economic growth this year with a surprising 7,5%. Impressive when you consider the size of its population and economy.

On the domestic front an interesting point made by the Governor of the Reserve Bank is that growth in credit to the corporate sector was a robust 13,9% in March 2015, compared to only 3,6% for households. We know that of the credit extended to households, mortgage debt makes up about 70% and this component is growing at approximately 2%. So if you want an answer as to whether house prices are going to grow by much over the next year the answer would be negative. Excellent news for property bulls like myself who are looking to buy for the long term.

For further information and an interactive analysis of this article follow my blog: andreaswassenaar.blogspot.com.

Andreas Wassenaar

Principal - Seeff Dolphin Coast

Cell: 082 837 9094

andreasw@seeff.com

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