Economists react to rates move, growth shocker

Downgrade risk still real - analysts on 0% growth forecast

as rand trades at R14.20/$

Property sector and homeowners can breathe sigh of relief as rate hikes since the end of 2013 to June this year have led to a cumulative increase in the bond instalment on the average priced home by 42.1%.

"It is not as if South Africa will be going into a recession,” said Kevin Lings, chief economist at Stanlib. Some sectors such as mining and manufacturing showed positive signs. The country has implemented a new build programme for electricity and export trade is gaining traction. Some commodity prices such as coal and iron ore have shown improvements too. The agricultural environment is also expected to get better, following the drought, he said.

"It is not as if South Africa will be going into a recession,” said Kevin Lings, chief economist at Stanlib. Some sectors such as mining and manufacturing showed positive signs. The country has implemented a new build programme for electricity and export trade is gaining traction. Some commodity prices such as coal and iron ore have shown improvements too. The agricultural environment is also expected to get better, following the drought, he said.

To recap: The SA Reserve Bank (Sarb) decided to keep the repo rate unchanged at 7%. The prime lending rate stays at 10.5%. Sarb governor Lesetja Kganyago said the latest Sarb forecast is for 0% growth in SA during 2016. He also said there is still a lot of uncertainty and inflation remains under pressure. The rand was up 8 cents from before Kganyago started his speech to R14.22/$ to the dollar at 16:52 on Thursday. The decision to keep the repo rate unchanged is in line with expectations and was widely welcomed as consumers have been under pressure. Economists and analysts, however, warned consumers to remain cautious in their spending.

And in other breaking news:

SAA terminates services of BnP Capital

David Crosoer, executive of research and investments at PPS Investments: Despite not raising rates, SA cash still offers investors real yield. The Brexit decision and the lack of interest rate increases by the US Federal Reserve have certainly given the Sarb breathing space. As expected, the Sarb governor stressed that we are still in an interest rate tightening cycle and that consumers can expect further rate hikes.

Rand trading at R14.22/$, that's 8c firmer from before the Sarb governor announced the MPC's decision on interest rates.

Sizwe Nxedlana, Chief Economist at FNB: Low spending growth means there is not too much money chasing few goods. This is reflected in core inflation that remains well contained around 5.5% despite previous bouts of rand weakness. Headline inflation is likely to increase further in the next few months, because domestic food and petrol prices will be higher during the second half of 2016 compared to the same period last year. However, it will peak in December and decline steadily over the course of 2017. The broad-based strengthening of the rand coupled with weak domestic growth, downside risks to global growth and domestic inflation that is likely to moderate in 2017 has significantly reduced the scope for the SARB to hike rates further.

Sizwe Nxedlana, Chief Economist at FNB: “The Sarb has chosen to keep rates on hold in line with the market and our expectations. The South African economy is undergoing a protracted period of weak growth. This is partly due to exceptionally weak growth in domestic spending that is likely to continue because of ongoing government belt-tightening, low growth in credit extension to households, low consumer confidence and the impact of previous interest hikes.

Glen Jordan, MD of IMB, a Fintech start-up based in South Africa mobilizing money through cell phone technology to solve real world problems in emerging markets: "It's great news for the struggling South African consumer. Sadly, the reprieve is less about SA doing well than the rest of the world doing badly. With this in mind, consumers should use this reprieve to pay off their expensive debt  pay up before the oil price goes up or the Rand goes down."

John Loos, household and property sector strategist at FNB: From a Consumer point of view, too, we are of the opinion that there was little need to hike interest rates. It has been important, in our opinion, to contain the pace of Household Sector Credit growth to levels below that of recently mediocre Household Disposable Income growth, in order to further lower the Household Debt-to-Disposable Income Ratio from its still-high 1st quarter level of 76.6% as at the 1st quarter of 2016. A lower Household Sector Debt-to-Disposable Income Ratio is crucial in lowering the level of household vulnerability to economic and interest rate pressures in the longer run. However, we are of the opinion that, for the time being, the SARB’s interest rate hiking to date is sufficient to sustain that declining Debt-to-Disposable Income Ratio trend in the near term, given the weak levels of consumer confidence currently prevailing as a result of major concerns around future economic performance of South Africa.

Stanlib chief economist Kevin Lings: Overall, while the Reserve Bank is still concerned that inflation will remain outside the inflation target for a protracted period, they are becoming more confident that inflation will move back inside the inflation target during 2017 and 2018. This includes the possibility of significantly positive base effects should the agricultural season improve in 2017 and the Rand remain range-bound. In contrast, the Bank is clearly a lot more worried about the growth outlook, having revised their growth forecast down to 0% in 2016. From our perspective, the Bank can afford to hold rates steady in the near-term, while they assess a range of factors including global financial market conditions post-Brexit, the possibility of the Federal Reserve resuming rate normalisation within the coming months and the risk that the South Africa’s fails to improve post the global government election. Lastly, the Bank will also be mindful of the ongoing risk of a credit rating downgrade in December, which may require a policy response. While we expect rates to remain on-hold in the short to medium term, it is premature to expect that the next move in interest rates will be a cut.

John Loos, household and property sector strategist at FNB: We believe it to be an appropriate decision from an inflation point of view. CPI inflation for June was indeed slightly above the 6.3% Sarb upper target limit of its 3-6% target range, with a drought-driven food price inflation spike being the biggest single driver of CPI inflation. However, besides food price inflation being an area of inflation over which the Sarb has no influence through monetary policy, this spike can be expected to pass through as the severe drought conditions lessen and as high base effects begin to impact on food’s year-on-year inflation rate. In addition, we have seen the Rand behave slightly better in recent weeks, which improves the inflation outlook by lowering imported price inflation pressures. Furthermore, the current economic weakness implies little in the way of home grown “demand-side” inflationary pressures, further justifying an unchanged rate decision.

Momentum, in collaboration with the University of South Africa, released the South African Household Wealth Index for the 1st quarter of 2016 this week which indicates that the value of households’ real net wealth increased during Q1 2016 despite contracting economic growth.

Ian Wason, CEO of Debt Management Company DebtBusters: The latest Credit Bureau Monitor Report released by the NCR indicates that approximately 54% of all credit active consumers in South Africa have impaired credit records. This is a frightening statistic which further demonstrates the difficult times consumers are facing. 22% of consumers are 3 months or more in arrears with their accounts. My fear is that these consumers will continue to default on their accounts, even more so now that inflation has increased.

TreasuryOne: South African Reserve Bank has left interest rates unchanged. Repo rate remains at 7.00% and prime rate remains at 10.50%. There is been no reaction in the currency market, as the decision was expected. USDZAR trading at R14.30 currently, still within the wider R14.20 to R14.40 range for now.

Ester Ochse, Channel Head at FNB Advisory: At the moment, people seem to be grateful to make it to the next interest rates review without defaulting on their debt commitments - instead of making the most of these changes to improve their financial security by saving, investing or quickly paying-off debt to boost disposable income. Even though most consumers’ financial position might be constrained due to the tough times, it is not ideal for people to merely survive interest rates changes without taking advantage of its opportunities.

Neil Roets, CEO of Debt Rescue : The current high unemployment rates remain concerning, at 26.4%. The short-term economic outlook is gloomy, and consumers are under severe financial strain.

The anxiety that many consumers feel during every interest rates review is an indication that most people do not plan long-term when it comes to their finances, says Ester Ochse, Channel Head at FNB Advisory.

Azar Jammine of Econometrix on CNBC Africa: Be careful just to focus on the forecast growth.

First National Bank (FNB) will maintain its prime lending rate at 10.5% following the decision earlier taken today by the South African Reserve Bank (SARB) Monetary Policy Committee to leave rates unchanged until the next MPC meeting in September. The decision applies to all prime-linked accounts. “In South Africa’s current pressurised economic position, the MPC is supporting growth and price stability with considerable skill and composure; it is a great asset in our economy deserving our appreciation. Both stability and policy clarity are critical if we are to encourage higher levels of investment and growth. There are clear opportunities arising in our manufacturing and tourism sectors as there are early signs that both are benefitting from the weaker rand,” says FNB CEO Jacques Celliers.

Lesiba Mothata, chief economist at Investment Solutions on CNBC Africa: Qualitative overlay was to say we are going to err on the more hawkish side regarding inflation.

Andre Cilliers Treasuryone on CNBC Africa: Things are looking better for SA. I think by 1st quarter of 2017 we will see a cut in interest rates and by June some ratings agencies might change from negative to stable.

SA Reserve Bank governor Lesetja Kganyago has announced interest rates will stay the same, with economists warning consumers to watch their spend.

According to Adrian Goslett, Regional Director and CEO of RE/MAX of Southern Africa, this is good news as an increase at this stage would only serve to negatively impact the residential housing markets with consumers already facing increasing financial strain with high debt levels and the cost of living escalating. With slow economic growth and inflation already placing financial strain on consumers, an interest rate hike would add to the pressure and adversely affect consumer sentiment towards the property market. “Affordability is already an issue for many consumers who want to buy property, but don’t meet the necessary qualifying criteria. An interest rate hike will further widen the gap between homeownership dreams and reality,” says Goslett. He notes that during the first half of this year demand for property has dampened as many buyers adopt a wait-and-see approach to the market. As a result the dynamics of the property market are slowly beginning to shift with more homes entering the market and the pool of potential buyers decreasing – this weighs in buyers’ favour, with sellers having to become more competitive with their prices.

Azar Jammine of Econometrix on CNBC Africa: I have sympathy with Sarb governor saying MPC cannot just chop and change the repo rate.

Lesiba Mothata, chief economist at Investment Solutions on CNBC Africa: 70% chance of substantial rains some say.

Repo rate at 7% means the prime lending rate stays at 10.5%.

Cash-strapped homeowners with mortgages, who are faced with inexorably rising consumer costs across the board, will be relieved at the Monetary Policy Committee’s decision to keep the repo rate steady, says Dr Andrew Golding, CE of the Pam Golding Property group. “Against the backdrop of a sharp spike in global political and economic uncertainty, including fallout from Brexit, comparably, South Africa’s outlook is encouraging. Just this week Bloomberg reported an inflow of investment of a record R85.7 billion in the country’s stocks and government bonds in June – a trend which has continued in July.” Dr Golding says despite economic pressures, South Africa’s housing market continues to reflect an ongoing demand for homes to buy and rent, with stock shortages still evident in sought after hubs and growth nodes. He says there is no doubt that an increasing focus on smaller, more affordable and conveniently located residential accommodation will continue to fuel the demand for sectional title living, whether for investment, primary residential use or to rent. “It also appears likely that new homeowners will remain a dominant force in the national housing market in general, and in the lower-price band below R1 million in particular, for the foreseeable future.

Lesiba Mothata, chief economist at Investment Solutions on CNBC Africa: Governor wants certainty of a few factors. I think he means the rand and capital inflows to emerging markets.

Lesiba Mothata, chief economist at Investment Solutions on CNBC Africa: Central bank will always err on the cautious side.

David Maynier, DA finance shadow minister on the Sarb's recent downward revision for the growth projections for the current year: The fact that the South African Reserve Bank has revised its economic growth forecast for 2016 down to 'zero percent' should be a wake-up call for government which now needs to get its act together and implement the structural reforms necessary to boost economic growth and create jobs in South Africa.

Rates on hold, rand strengthens to R14.26/$

With a R1.63 trillion being owed to lenders, South African consumers are highly indebted. Though the repo rate remains unchanged, this is not seen as relief as the cost of living is high, particularly with the after-effects of the drought still being felt. Consumers need to spend wisely and tighten their belts, states Neil Roets, Debt Rescue CEO.

Jacques Du Toit, Absa, Senior Economist: The Monetary Policy Committee of the South African Reserve Bank had to consider various key factors in making their decision regarding interest rates today. Negative economic growth numbers for Quarter 1 and the latest forecast by the International Monetary Fund and the South African Reserve Bank for economic growth during 2016 would have been pointing towards a hold on rates. Similarly the expectations for central banks around the world to keep interest rates at historic low levels post “Brexit” would have provided the Sarb with additional space to keep rates on hold. While the recent trend in cpi inflation has also been pointing towards leaving rates unchanged, higher food process and a weaker rand since the end of 2015 are expected to put upward pressure on inflation in months to come. The upcoming local elections, a stabilizing rand and the increase in interest rates since the start of the year would also be factors that were considered in discussions during the past few days. Given these considerations the decision to keep the repo rate at 9% came as no surprise to the market. Further interest rate hikes of between 0.25% and 0.50% are, however, expected during the remainder of 2016 as inflation remains above the 3% to 6%target band.

Kganyago: Political developments and economic developments impact exchange rates.

Kganyago: Currencies react to all sorts of things.

Kganyago: That is why data becomes so important.

Kganyago: We could not have cut this time as one needs to be certain about where you are going.

Kganyago: Deliberations of the MPC was very clear about neither a cut nor a hike this time.

No news is good news as Repo Rate remains unchanged

Reserve Bank Governor Lesetja Kganyago today announced that the repo rate will remain unchanged at 7% bringing some good news for 2016, a year that so far has experienced many ups and downs in South Africa’s economic landscape.

However, an increase in the Consumer Price Inflation index for June to 6.3% year-on-year from 6.1% in May, largely due to increases in food and non-alcoholic beverages as well as transport (petrol and energy) will surely hurt consumers’ pockets.

Ian Wason, CEO of Debt Management Company DebtBusters, says he is concerned about the profiles of South African consumers who enquire for financial assistance. “DebtBusters has seen clients require 101% of their net income to service their debt obligations. The rise in the inflation rate will provide added pressure for consumers already living on the bread line”, says Wason.

“The changes to affordability assessments (required for credit providers when assessing whether consumers are eligible for credit) make it harder for consumers to access credit. Although this is a good move by the regulator, consumers who were previously reliant on credit to survive will no longer be able to receive credit very easily, squeezing consumers even further,” says Wason.

The latest Credit Bureau Monitor Report released by the NCR indicates that approximately 54% of all credit active consumers in South Africa have impaired credit records.

“This is a frightening statistic which further demonstrates the difficult times consumers are facing. 22% of consumers are 3 months or more in arrears with their accounts. My fear is that these consumers will continue to default on their accounts, even more so now that inflation has increased,” ends Wason.

Rand smiles as repo rate remains unchanged. It is now trading at R14.26/$.

Kganyago: The outlook going forward created chance for us to press pause button in the cycle.