Inflation up but interest rates steady

The consumer inflation rate was higher than predicted, rising to 4,6% in May and up from 4,2% in April but economists have not yet revised predictions on a hike in interest rates by the Monetary Policy Committee of the South African Reserve Bank.

SARB’s repo rate was cut to just 5,5% in November last year, dropping interest rates for consumers to a record low of 9%. A spike in interest rates will place considerable pressure on property owners, as many of them try to downscale their costs in orderto meet their monthly commitments.

Elna Moolman, an economist at BJM Renaissance, says that the latest data is unlikely to mean that the interest rates will start to rise earlier than predicted even though the SARB has revised its estimates for higher inflation over the coming months.

The figures indicate that the inflation rate will remain within the Bank’s target range of between 3% and 6% for the rest of this year but will increase to about 6,3% early next year when rates are expected to be hiked.

The spike in inflation rates has been prompted by higher-than-expected increases in food prices, which are up 1,7% month-on-month. Food prices have a weighting of about 15% in the price basket used to calculate the average inflation rate and these rose by 6,3% year-on-year.

Moolman says that adverse weather conditions prevailing throughout the country, coupled with a fall in output from the agricultural sector were contributing to higher food prices.

Higher electricity prices, along with a sharp increase in fuel prices had also contributed to the spike in the inflation rate. Electricity prices have risen by 19% in May compared with a year ago.

Threats to SA's Property Market

PRETORIA - Steep increases in municipal rates, electricity and service charges will be one of the factors to watch in the property market according to Absa's senior Property Analyst Jacques du Toit. This and possible increases in interest rates were two of the potential threats to the property market in the coming months.

Du Toit recently addressed the 2010 ARELLO District 6 meeting in Sandton about the prospects of the local housing market going forward and said it was unlikely that the property market was heading for a boom, despite the recent recovery in house prices. The Association of Real Estate Licence Law Officials (ARELLO) is an international organisation and South Africa forms part of ARELLO District 6, which consists of non-American countries.

In a post-conference interview with Realestateweb, Du Toit said he expected the recovery in the housing market to be gradual and dependent on the income position of households. "Debt levels are high. There have been job losses and large scale unemployment during the course of 2009. Also in the first quarter of 2010 the latest figures from Statistics SA show that there has been another round of job losses. This has an impact on the disposable income of households and while this situation persists the property market will remain under pressure."

Unlike some analysts Du Toit doesn't believe that we are headed for a double recessionary dip, but cautions that the situation in Europe may have a macroeconomic spill-over, which will impact on South Africa. "At this stage it doesn't look like this will have a major effect on South Africa, but as far as house price growth is concerned we are expecting somewhat slower year-on-year growth in the second half of 2010."

Du Toit notes that the leisure market has been slow to recover and that the coastal market has remained sluggish because of that. This however may present opportunities for investors who are looking for "good buys".

A hike in interest rates may also become a factor in the second half of 2011. "We feel that is when inflationary pressures will start to escalate, especially due to electricity and other service hikes and government may increase interest rates in an effort to curb inflation."

We asked how big an impact he expects electricity and municipal rate hikes to have on homeowners: "I believe this is going to play an increasing role in the choices prospective homebuyers make in the future. We'll be seeing major hikes in electricity and the resulting impact on the cost of running a household. There is also the issue of increasing rates, and buyers will take this into account when deciding on a property."

YDL Investment Property CEO Anton de Leeuw agrees with Du Toit's analysis. "From an investment perspective there has been a significant drop in the buy-to-let market. Investors are worried about returns and they are worried that prices may contract even further. What we've found with our client base is that there has been a significant shift to buying distressed properties, where properties are bought at substantial discount to market value. "

De Leeuw says despite the difficult market conditions their investors are still looking at average yields of about 10%, but agrees that profits in the property market are to be made in the long haul, as quick turnaround speculative profit opportunities are becoming harder to come by.

Hundreds, Bru !!

The Monetary Policy Committee of the SA Reserve Bank has cut the repo rate by 100-basis-points, Governor Tito Mboweni said on Tuesday.

The repo rate now stands at 9.5 percent while prime has been reduced to 13 percent.

"The global economy has continued to weaken significantly in recent months as a result of the turmoil in the financial markets.

"There is growing uncertainty regarding the depth and duration of the economic slowdown," Mboweni said.

He added that the South African economy had not escaped the impact of these developments, and domestic production had contracted as a result of weak domestic demand and a significant decline in export demand.

"Against this backdrop of widening domestic and global output gaps, the balance of risks to the inflation outlook has changed somewhat," he said.

Mboweni said that inflation — as measured by the reweighted and reconstituted consumer price index (CPI) for all urban areas — measured 8.1 percent in January 2009.

Food and non-alcoholic beverages prices, which increased at year-on-year rates of 15.7 percent in January, contributed 2.4 percentage points to total inflation.

The housing and utilities category contributed 2.1 percentage points, and together with food accounted for more than half of the measured inflation increase, Mboweni said.

The transport component had a minimal impact on the overall CPI as a result of the 20.3 percent reduction in petrol prices during January.

Producer price inflation, which reached 19.1 percent in August 2008, continued its downward trend, he said, measuring 9.2 percent in January 2009.

Despite the depreciation of the rand during 2008, producer prices of imported goods declined at a year-on-year rate of five percent in January.

Turning to the inflation outlook, Mboweni said the most recent central forecast of the Reserve Bank showed a near-term deterioration in the inflation outlook but a more favourable trend was forecast for the medium term, which was the relevant time frame for monetary policy.

Consumer price inflation was expected to average 8.1 percent in the first quarter of 2009 and then to decline to below six percent in the third quarter of the year.

As a result of technical base effects, inflation was then expected to marginally exceed the upper end of the inflation target range, before returning back to within the range in the second quarter of 2010.

It should remain there until the end of the forecast period in the fourth quarter of 2010, when it was expected to average 5.3 percent.

"The heightened levels of uncertainty and the rate of change of global developments make these forecasts subject to higher risk than is usually the case," Mboweni warned.

He said the inflation outlook had been dominated by the continued weakening of the global economy and financial markets, notwithstanding significant monetary and fiscal measures introduced by central banks and governments.

"The decline in global demand has resulted in a marked contraction in international trade," he said.

He reminded South Africans that the International Monetary Fund, which in January was forecasting global growth to average 0.5 percent in 2009, now expected the global economy to contract by up to one percent in 2009.

"Numerous industrialised and developing countries are already experiencing negative growth.

"World inflation is being restrained by declining demand and lower commodity prices which are expected to remain subdued under these conditions of negative or low growth.

"The weak global demand has been reflected in the export performance of the South African economy and domestic demand conditions had also deteriorated further," he said.

"Domestic demand conditions are expected to remain under pressure as a result of declining disposable incomes, tighter credit conditions and negative wealth effects."

Mboweni said the upside risks to the inflation outlook emanated primarily from cost-push pressures, particularly from administered prices.

"These include possible higher-than-expected electricity tariff increases," he said.

The decline in inflation might also be delayed by continued high rates of increases in food prices, despite marked declines in producer price food inflation, Mboweni said.