Unchanged rates won't lift consumer confidence - experts

Cape Town - The SA Reserve Bank's decision on Thursday to keep the repo rate unchanged at 6.75% will likely keep consumer confidence in the doldrums, according to John Loos, household and property sector strategist at FNB.

"The potential impact of the latest Monetary Policy Committee (MPC) decision on the consumer and housing market will likely be a push to take a more conservative financial approach, given the household sector's financial weakness and significant concerns regarding SA's economic future," said Loos.

In his view, SARB would have been justified in lowering the repo rate, because of CPI (Consumer Price Index) inflation being well within the bank’s 3% to 6% target range. CPI recorded an August year-on-year growth rate of 4.8%.

"The alleviation of the nationwide drought earlier in 2017, and a resultant drop in food price inflation, has been a key factor in lowering CPI inflation to within the target range, while a reasonably well-behaved rand since the late-2015 Nenegate shock has contained imported price inflation," explained Loos.

Jacques du Toit, property analyst at Absa Home Loans, told Fin24 that the bank's forecast was for a 25 basis points reduction in the repo rate.

Du Toit said some of the reasons why SARB decided not to cut rates included that inflation pressure could build, and a high chance of fuel prices increasing more.

He said factors that may play a role in building inflationary pressure include the oil price showing a continual increase, the rand exchange rate having weakened and an already existing under-recovery on fuel prices.

Loos agreed that SARB concerned itself with possible risks. Political volatility and potential ratings downgrades risks were mentioned in the MPC statement for instance, and Loos pointed out that rand risks are always a potential source of imported price inflation.

Given the unchanged rate decision, FNB expects average house price growth to remain in lower single-digit territory in the near term. The August FNB House Price Index measured 4% year-on-year growth.

David Crosoer, executive of research and investments at PPS Investments, also warned consumers to brace themselves for a "sobering" mini budget in October and a tough "interrogation" from the ratings agencies in December.

"Our view remains that the SARB will have limited opportunity to cut interest rates again," said Crosoer.

Tumisho Grater, economic strategist at Novare, said while some may be disappointed that the SARB did not cut rates this time around, a 25 basis point cut would not necessarily have spurred an economic recovery.

"The focus needs to be placed on rebuilding confidence so that the private sector is encouraged to spend through investment, leading to job creation and ultimately a more confident consumer," she said.

She pointed out that the SARB also addressed the possible impact of an electricity tariff increase - stating that a tariff increase of 20% could translate into the headline inflation forecast being raised by between 0.2 and 0.3 percentage points.
"As a whole, the economic growth outlook remains weak...Contributing to the latter is fragile business confidence...Furthermore, the outlook for household consumption is also lacklustre," said Grater.  

SUBSCRIBE FOR FREE UPDATE: Get Fin24's top morning business news and opinions in your inbox.

Read Fin24's top stories trending on Twitter:

Brent Crude
All Share
Top 40
Financial 15
Industrial 25
Resource 10
All JSE data delayed by at least 15 minutes morningstar logo
Company Snapshot
Voting Booth
Do you think it was a good idea for the government to approach the IMF for a $4.3 billion loan to fight Covid-19?
Please select an option Oops! Something went wrong, please try again later.
Yes. We need the money.
11% - 929 votes
It depends on how the funds are used.
74% - 6241 votes
No. We should have gotten the loan elsewhere.
15% - 1284 votes