Bugle Sales Talk Editorial

The Monetary Policy Committee of the Reserve Bank had its sixth and final meeting of the year last week between the 17th-19th November to deliberate what should be done with its key policy interest rate through which it controls all interest rates within our domestic economy and targets CPI inflation as its primary mandate. Its goal is to keep inflation within the 3-6% target range. Currently CPI inflation is measured at 4,7% as of October - neatly centered within this target range.

The outcome was an increase in the bank's repo rate from 6% to 6,25%. This immediately triggered a similar increase with prime interest rates adjusting from 9,5% to 9,75%. Since July 2012 interest rates have increased by 125 basis points or 1,25% from 8,5%, its recent low point, in four steps to its current 9,75%. In terms of historical interest rate cycles within South Africa this upward cycle has been relatively flat and easy to digest. The dilemma the Reserve Bank faces is increasing interest rates in an ever weaker economic environment and the risk of killing off the little bit of growth that has been evident.

In his statement issued last week, the Governor, Lesetja Kganyago, does admit that this is the challenge and that out of their committee of 6 people four voted for an increase while 2 members wanted rates to remain unchanged. Even at this level of economic decision making there is no clear consensus and the decisions become increasingly more difficult when the prickly subject of unemployment and job creation is considered. The Governor identified the key risks to our inflation rate as being the depreciating Rand, the risk of electricity tariff increases and drought conditions and the potential impact on food prices.

On the exchange rate front it is interesting to note that over the past three months, according to JSE data, non-resident sales of equities amounted to R25,9bn, while net bond sales amounted to R5,9bn. These investments are often driven by sentiment and how those fund managers who control such large amounts of investment capital perceive South Africa on a global playing field. At the moment they are, on average, allocating their funds elsewhere, which is impacting on our Rand exchange rate. The Reserve Bank is currently forecasting economic growth of 1,4% for this year and 1,5% for 2016. The number of new vehicle sales in October this year was 36,175 cars, down from 37,309 cars in September. When considering these monthly new car sales figures we do see peaks such as 42,915 cars in September 2014 but on average around the 35,000 cars a month is representative of the market.

It is interesting to note that the average monthly new car sales figures within the US is currently approximately 650,000. That tends to put the relative size of the markets into perspective.

The depreciating Rand has an immediate impact on the cost of new vehicles. As the new vehicle market slows the second hand market increases as people decide to opt for the less expensive used car options. The property market is similar in many ways in that the new developments tend to come at a premium price, also impacted by a depreciating Rand as a large component of every home uses materials that respond to movements in our exchange rate. The second hand market for homes tends to trade at a discount of approximately 25% to new homes and is also influenced by the performance of the new home market. As with new vehicle sales, home sales are also very credit driven, and increases in the cost of this credit can be expected to impact on the volumes traded.

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