Reserve Bank decides to leave interest rates where they are

As expected by market commentators, it was decided at the second Monetary Policy Committee meeting of 2015 that the interest rate would hold at its current level. This means that the prime lending rate will remain at 9.25% and the repo rate will remain at 5.75%.

Regional Director and CEO of RE/MAX of Southern Africa, Adrian Goslett, says that the decision to keep the rates unchanged will be welcomed news for consumers who are already dealing with ongoing rolling blackouts and the increasing cost of living. He notes that although consumers enjoyed fuel price cuts during the first three months of this year, the fuel price will once again be increased, placing further financial pressure on cash-strapped households.

Goslett says that with the fuel price increases, inflation is expected to marginally edge higher in the months ahead, however economists expect that it will still remain within the target band of between 3% and 6% for a while longer. Despite the fact that oil prices have increased, they are still a lot lower than the average of $115/barrel as seen last year.

Even though there was the widely accepted premise that economic growth would strengthen and the South African Reserve Bank would need to increase the interest rate to contain inflation, economic growth remains much slower than desired. In fact, Goslett says that inflation fell to a four-year low of 3.9% year-on-year in February from 4.4% in January. This means that inflation has been within the target band for the last six months. With inflation lowering and the US Federal Reserve (Fed) now likely to delay their first rate hike, the SA Reserve Bank will likely delay the next interest rate hike as well.

According to Goslett, other factors such as the rand weakening to the dollar since the first committee meeting could also prompt the bank to revise its inflation forecast for the year. Despite warning from the Reserve Bank that the interest rate was likely to increase during 2015, it is widely agreed upon by economists that the interest rates will remain unchanged again at the May meeting, and possibly the July meeting too.

“If this is the case, delays in interest rate hikes will be good news for the local residential property market and those wanting to purchase a home,” says Goslett. “Over the last few years consumer’s disposable income has been overtaken by house price growth, which means that housing is slowly becoming less affordable. If inflation remains low and an interest rate hike is delayed, consumers will have more of a chance to close the gap between their disposable income and the price of property,” he concludes.