Interest rate move: A view from the Wakefields Real Estate Chief Executive

Gill Marcus took everyone by surprise with her 50 basis point interest rate increase last week. In one poll of 25 economists, none had predicted the upward move in interest rates, and I believe the public as a whole were getting quite used to the idea that interest rates don’t go up and aren’t going up.

The question on everybody’s lips now is what next? What does this mean for property in general for the rest of the year and will there be further interest rate increases?

I believe the fact that Marcus increased interest rates in an election year shows the independence of the Reserve Bank from political party interference which is a huge plus and shows credibility on the part of the Reserve Bank in sticking to its mandate even when growth in the economy is waning of late.

I don’t believe the 50 basis point increase in interest rates will have any effect on the property market. Monetary policy is still very accommodative and if you look at South Africa’s historic interest rates we are still at levels very near the bottom of historic averages. Looking forward, will rates go up again? The answer to that question is anybody’s guess and I don’t have a crystal ball but here are the factors at play.

1.       An improving American economy: The better the US economy gets is resulting in tapering on their part which in turn is having a detrimental effect on our Rand and inflation outlook. Gill Marcus’s primary mandate is to keep our inflation inside the targeted band of between 3% and 6%. As a result of those inflation forecasts being greater than 6%, Marcus’s hand is being forced to increase rates. Will the US economy continue improving even when their monetary policy is being “tightened” is the million dollar question.

2.       South Africa needs to up its game: Sadly we have been lumped together into the Emerging market basket of 5 currencies most vulnerable right now along with Brazil, India, Turkey and Indonesia (The Fragile 5). In essence our government is spending more than it’s bringing in, we are importing more than we are exporting and our households are borrowing more than they are saving. As a result of that South Africa has been susceptible to currency depreciation which we have seen. The Rand has depreciated 72% vs the dollar in the last 3 years. Over time a weakening Rand will help the trade deficit, but we have to ensure our household balance sheets are in order and our debt is paid down. Strikes, administered pricing and loss making parastatals are not helping the situation.

Whichever factors win out, I believe that as South Africans we have to ensure we reduce our debt accordingly, and start saving. Hopefully our government will sort out the government deficit and, the weakening Rand, over time, will help our trade deficit.  I would rather we helped ourselves than rely on the dealings in foreign markets and foreign central banks to decide our fate. There is always going to be that at play with currency traders moving currencies from wildly undervalued to overvalued in relatively short periods of time. Let’s get our house in order now and keep those swings to a minimum. I believe that is the message Marcus is sending by increasing the cost of money ….I just hope we are listening. – Myles Wakefield CEO Wakefields Real Estate.