First National Bank (FNB) property economist Siphamandla Mkhwanazi is biting the bullet and has made a call that the South African Reserve Bank (Sarb) will cut the repo rate by 25 basis points on Thursday.
“The ‘house view’ at FNB is that the reserve bank will cut the repo rate some time in the first half of the year, but I believe it may surprise the market with a cut this week,” he told Moneyweb on Wednesday.
Asked about his expectations on interest rates following the release of the latest FNB Residential Property Barometer report, Mkhwanazi said there are “increased prospects” of a cut in the wake of the country going into an extended Alert Level 3 lockdown.
“The Covid-19 second wave and imposition of Level 3 will put some pressure on the Sarb’s Monetary Policy Committee (MPC) to reduce the repo rate at its first meeting of the year. However, the MPC may opt to wait to see what happens in February’s national budget speech, before deciding on a cut,” he noted.
“Government has already said that from a fiscal side it does not have money for further stimulus and support measures. The economy is going to take a hit from the second wave and further lockdown restrictions, in addition to the load shedding that we’ve been having,” he explained.
“The Sarb may have little option but to cut the repo rate again as a monetary policy stimulus to the economy….
“Inflation for December came in at 3.1% on Wednesday – a 16-year low. There is inflation risk, with food inflation especially picking up, but overall inflation is well within the bank’s 3% to 6% target,” added Mkhwanazi.
He pointed out that South Africa is expecting a bumper maize crop this year, which will help ease food inflation. However, an increasing oil price and uncertainty around the rand may throw a spanner in the works.
“The MPC may decide to front load a rate cut for the year, considering where the country is right now. Worth also noting is that two members of the five-member MPC have voted for a repo rate cut at the last few meetings. This week’s decision is likely to also be a tight one,” he added.
Mkhwanazi’s view about a repo rate cut is contrary to the consensus among economists for the Sarb to keep the rate unchanged on Thursday. Most economists are now anticipating the rate to remain steady this year.
The Sarb slashed the repo rate by 300 basis points last year, to a more than 40-year low of 3.5%.
It came in the wake of the devastating impact of the Covid-19 pandemic and initial hard lockdown on the economy.
However, the last cut was in July last year, when it was trimmed by 25 basis points, bringing the prime interest rate to 7%.
Meanwhile, Mkhwanazi expects house prices in South Africa to decline by 2.2% on average this year. The multi-decade low interest rates had buoyed the residential property market last year, with new mortgage applications hitting a 10-year high.
Despite the impact of the Covid-19 pandemic on the economy, the FNB House Price Index shows house prices remained resilient in the second half of 2020, rising to 3.5% year-on-year in December from 3.3% in November.
“This is in contrast to initial expectations of more subdued price growth. However, the pace of this annual price growth is decelerating,” Mkhwanazi notes in the latest Barometer report.
“What happens when the [low] interest-rate-induced demand dries up? There were around 1.1 million job losses last year according to StatsSA and the economy shrank. We need a growing economy and jobs to see real growth in the property market,” he said.