At its second meeting of the year, the South African Reserve Bank’s (SARB) Monetary Policy Committee (MPC) decided to increase the repurchase rate by 50 basis points to 7.75% a year, with effect from 31 March 2023.
This increases the prime rate to 11.25%, which is lower than it was just after the 2008 Global Financial Crisis. In mid-2008, when the GFC peaked, the interest rate increased to 15.5%.
Three committee members preferred the announced increase, whereas two members preferred a 25 basis points increase.
"The revised repurchase rate is now less accommodative and is more consistent with the current view of risks to inflation," said SARB Governor Lesetja Kganyago.
“The aim of SARB policy is to anchor inflation expectations more firmly around the mid-point of the target band and to increase confidence of attaining the inflation target sustainably over time.”
He said that sticky inflation, sluggish growth and now elevated financial stability risks mark the global economy.
“Despite somewhat better growth outcomes in the first months of the year, we see no material easing of difficult global economic conditions. Russia's ongoing war in the Ukraine weighs heavily on European growth prospects while financial conditions in the United States continue to tighten. The growth outlook for China has improved but is likely to remain modest by historical standards. Many economies in the developing world face weaker economic growth and prolonged adverse financing conditions.
“With inflation and policy rates remaining higher for longer, and new weaknesses emerging in financial institutions, we expect global financial markets to remain volatile.”
He said that the South African economy contracted by 1.3% in the fourth quarter of 2022 - considerably worse than expected at the time of the January meeting. The contraction was broad-based, consistent with the extensive load-shedding experienced in the final three months of the year.
“As a result of extensive load-shedding and logistical constraints, the supply performance of the economy remains severely impaired. As previously noted, these constraints deduct two percentage points from growth this year,” said Kganyago.
“Interest rates in major economies are higher than projected in January, averaging 3.8% in 2023 (up from 3.7%), 3.5% in 2024, and unchanged at 2.4% in 2025. Tighter global financial conditions raise the risk profiles of economies needing foreign capital, leading generally to weaker currencies.
"South Africa's risk premium is sharply higher and will likely remain elevated over the forecast period. Given load shedding, upside inflation risks, and larger external financing needs, further currency weakness appears likely. Inflation expectations increased strongly over the past year. Average expectations of future inflation surveyed in the first quarter of this year increased further to 6.3% for 2023 and 5.8% for 2024. Based on market surveys, inflation for 2023 is expected to be around 5.8%.”
Industry comment
Property industry leaders had hoped for a pause in the interest rate hiking cycle. However, most believe the market is stable despite the MPC’s decision to increase the repo rate.
Samuel Seeff, the Seeff Property Group chairman, says the SARB faced a difficult decision. "The Eskom energy crisis, weak business confidence, deterioration of the CPI inflation to 7% in February (from 6.9% in January), and pressure on the currency left little room to manoeuvre.
“We believe the 50 bps increase is a bit steep, and the SARB could have kept it to 25 bps. Nonetheless, the hike was largely expected and has already been factored in by the market. Although not ideal, the rate is still below the historic average of the last 20 to 30 years, and the property market is still strong and stable.”
Dr Andrew Golding, chief executive of the Pam Golding Property group, says that a pause in the upward cycle would have allowed some breathing space and stimulated positive market sentiment.
“A key for the economy in general and the property market, in particular, is the state of household finances. These are under pressure as a result of the recent resurgence in the cost of living and a series of hikes which have taken interest rates to above pre-Covid levels.
“Although it is difficult to predict at present, we hope that we have reached the peak of the current interest rate hiking cycle, with the weakening in the economy likely to limit the Reserve Bank’s appetite for further interest rate hikes, at least for a while. This would then allow the full effects of the interest rate hikes already implemented to take effect.”
Tony Clarke, managing director of the Rawson Property Group, says: “I don’t think there was any doubt that the interest rate would go up again this month. Inflation has remained stubbornly outside the target range set by the Reserve Bank, and this is one of the very few mechanisms it has to bring that under control.
“Some analysts are predicting the beginning of a downward repo rate cycle as early as late 2023. While this would bring much-needed relief to existing homeowners and a valuable boost to property market confidence and buyer activity, we believe the road ahead for property is not without challenges.
“South Africa’s economic woes are weighing heavily on the property market. People are struggling to make ends meet, let alone save for big investments like property purchases. This, together with the rising costs of property finance, has steadily eroded the pool of qualified buyers.
“As a result, property supply significantly outweighs demand in most areas, contributing to slow house price inflation (HPI). Lightstone statistics show that national HPI has been positive but below inflation for some time.”
Regional director and chief executive of RE/MAX of Southern Africa, Adrian Goslett, is hopeful that interest rates will stabilise following this MPC meeting.
“Provided there are no more surprises in global markets and our energy crisis does not worsen, it is possible this could be the last interest rate hike for the next while. It all depends on whether the MPC decides the risks to inflation are under control.
“This interest rate hike will undoubtedly be the most challenging for homeowners who bought when interest rates were at their lowest. Although most buyers plan for at least a handful of interest rate hikes, I doubt very much many would have left room in their budgets for the interest rates to climb so consistently over the last 15 months or so.”
John Loos, property sector strategist at FNB Commercial Property Finance, says the latest 50 basis point interest rate hike has a potentially limited dampening impact on the commercial property market strength.
“We believe the full impact of all the interest rate hiking will feed into the market during the course of 2023, slowing demand for commercial property financed by mortgage borrowing.
“Cumulative interest rate hiking to date is likely to see demand for mortgage financed commercial property slow, the commercial property market soften, and property income growth come under increased pressure, with vacancy rates possibly rise once more as tenant financial pressure increases. Interest rate hiking to date is expected to play a key role in this market weakening in 2023, although it is not the only headwind - a struggling world economy and high local load shedding being the other negative factors.
“On the residential development side of the market, new building planning is already in sharp decline, and this latest rate hike merely reinforces that declining trend.
“For the residential rental market, earlier interest rate hiking gave some mild support, as aspirant buyers postponed their home buying and remained in the rental market for longer. But given the increasingly severe magnitude of interest rate hiking since late-2021, we believe that the earlier recovery in the rental market may now stall, with the tenant population starting to experience increased financial pressure in a significantly weaker economic environment.”
High Street Auctions director, Greg Dart, says the repo rate hike of 50 basis points is shocking and deals a serious blow to consumers.
“The basic cost of living is out of control for most South Africans. Food price inflation is at a 14-years high, and load shedding is now shedding more jobs than kilowatt hours as manufacturing down-times grow ever longer. We are sure to see far greater numbers of small businesses closing doors in the next quarter.
“The private sector is not blind to the fact that the Reserve Bank has a duty of care to keep a cap on inflation, but perhaps it needs a plan B because the current plan clearly isn’t working.
“We all knew another rate hike would come before the end of this quarter, but the MPC should have followed the US Central Bank’s example last week and kept the increase to 25 basis points.”
Dart believes the property industry will likely cool after the 50-basis point hike when the industry was expecting 25.
“The MPC’s unpredictability isn’t good for investor confidence. My best advice right now is for sellers to price realistically and for buyers to do their homework, investing in assets that will deliver long-term returns."
Lew Geffen Sotheby’s International Realty chief executive, Yael Geffen, says the MPC’s decision to impose a 50-basis point repo rate is dismaying.
“As far as the South African economy is concerned, there’s definitely light at the end of the tunnel, but it’s an oncoming train. It has to be because no light is coming from Eskom.
"As a nation, we are in the highest food inflation cycle since 2009. We’re also at the highest prime lending rate since 2009, and if the economy continues to shrink as it did in the latter part of 2022, we're going to be in a recession.
“The Reserve Bank has to cut us some slack. Nobody is getting salary increases that can accommodate R5 500’s worth of monthly mortgage repayment hikes in 18 months - the case for every household in the country servicing a R2 million bond. The situation is untenable; people are going to lose their homes and their livelihoods.”
Geffen advises sellers to be realistic about pricing in the current market.
“There are buyers out there, but in uncertain times they’re less inclined to take risks. They’re looking for solid investments that will deliver in the long term, and sellers who offer that are going to close the deals.”
Writer: Sarah-Jane Meyer