The Reserve Bank hiked the repo rate by 75 basis points (bps) to 5% and the prime 9% on Thursday amid rising fuel and food prices and the war in Ukraine. Governor Lesetja Kganyago said the Bank was trying to curb inflation while protecting the rand.
The repo rate is the rate at which the Reserve Bank lends to commercial banks by purchasing securities while the prime interest rate is the rate commercial banks charge their customers. Both are indicators of the economy’s performance. High interest rates make it harder for businesses and individuals to service debt and encourage people to leave their cash in the bank instead of spending it on what may be deemed as riskier investments.
Globally interest rates have been high with the European Central Bank raising them 0.50% in its first hike in 11 years.
But Dr Andrew Golding, CEO of Pam Golding Properties explained that rates are still below pre-Covid-19 levels where the prime rate had reached 10%.
“With the inflation outlook deteriorating since the previous Monetary Policy Committee (MPC) meeting, with the headline inflation rate again breaching the upper limit of the 4-6% target for the second consecutive month at 7.4% in June 2022, it was inevitable that a decision would be taken to further increase the repo rate, the question was simply by how much,” he said.
“The Reserve Bank would have had to grapple with an unusually complex set of circumstances when making its decision to hike the rate by 75 bps, amid resurgent inflationary pressures, with the impact of a series of hefty petrol price increases still to be felt, an ongoing war in Ukraine and the growing risks of a global recession,” he said.
The Bank has realised there is a weakening growth outlook both globally and locally. The hike decision came after a 3-1-1 vote, with three MPC members opting for a 75 bps hike while the others vouched for 50 bps and 100 bps respectively.
“South Africa is having to contend with the negative impacts of the flooding in KwaZulu-Natal, severe national loadshedding and a household sector whose finances are under intense pressure from rising food and energy prices,” Golding said.
“Banks retain their appetite for extending mortgages to homebuyers, which is providing a solid underpinning for the local housing market, even as we move into an era of gradually rising interest rates and increasing pressure on household finances. The banks’ appetite to extend mortgages is reflected in the latest Ooba data, which shows that mortgages as a percentage of purchase price have risen to a level of 93% in recent months six-month moving average, which is the highest level in well over a decade.” he said.
Ooba services clients so they can get mortgages.
Samuel Seeff, chairman of Seeff Property Group said although homeowners and buyers will still need to adjust to the higher costs, his team expects the property market to remain resilient.
“While slower year-on-year, we continue seeing a strong market despite the rate hikes and could end with another good year, and still ahead of the pre-pandemic volumes,” he said.
It was not the interest rate so much, but rather other factors which could have a bigger impact on the property market. These included the weak economy compounded by the lack of action on the Zondo Corruption Report, the Ramaphosa Phala-Phala scandal, electricity crisis, fuel hikes and record low business confidence levels; all of which required urgent government intervention.
“The economy must grow as a matter of urgency, he adds. Increasing the interest rate is an impediment to growth and the Reserve Bank must keep rate hikes to a minimum and avoid rate shocks which could be disastrous at a time when the economy is facing significant challenges,” Seeff said.
The Bank’s forecast for SA’s GDP growth is 1.3% for 2023 and 1.5% for 2024, down from 1.9% previously for both years.
TABLE OF HOW BOND PAYMENTS WILL CHANGE BASED ON 9% PRIME RATE
R750 000 bond – extra R358 (repayment increases from R6 390 to R6 748)
R900 000 bond – extra R429 (repayment increases from R7 669 to R8 098)
R1000 000 bond – extra R476 (repayment increases from R8 521 to R8 997)
R1500 000 bond – extra R715 (repayment increases from R12 781 to R13 496)
R2000 000 bond – extra R954 (repayment increases from R17 041 to R17 995)
R2,500,000 bond – extra R1 191 (repayment increases from R21 302 to R22 493)