The latest interest rate decision

The SA Reserve Bank’s decision to hold interest rates steady signifies the beginning of an economic turnaround, and will have a significant impact on sentiment and the actual economy itself. This will have a momentous impact on both the economy and the man in the street. The South African economy is part of a global community and largely dependent on factors way outside of our control. The surge in food and oil prices, along with rand volatility, cannot be addressed by increasing interest rates.

While optimising the fine balance between controlling consumer spending and ensuring economic growth is clearly a primary consideration for our government, the impact of the previous rate hikes is hurting the economy, and an additional rate hike would have potentially tipped the balance. It is unlikely that the Reserve Bank will reduce interest rates in the near future and while this might be uncomfortable for many, it is in our national interest to control inflation, particularly during the current international market turmoil.

This decision by the Reserve Bank is the latest in a number of positive indicators in recent weeks: the petrol price has declined and will do so again next month; the rand has had a period of relative strength; and there are strong indications that inflation is not as high as it was made out to be, and should begin declining, to around 8% by next year, which is within the target range of the Reserve Bank. By leaving the interest rate unchanged, the Reserve Bank has given the economy yet another shot in the arm.

This decision should have a positive impact on the property market, which has slowed down due to the credit squeeze and general market sentiment. South African house prices remain almost a third of the average price of property in the UK and significantly lower than the US. House prices in the UK and US have not dropped off dramatically during the housing crisis, even though it has been far worse than we are experiencing in South Africa.

Our property prices should remain static for the next year. This will effectively mean that with our current inflation rate, we will probably not see any real price growth over the next year. However, South Africa’s economic stability and growth will continue to create job opportunities and thereby improve conditions for many people, creating new entrants to the property market. We do not have the huge surplus of property that the US has created (without an emerging market) and given the restrictions Eskom is imposing on developers, plus the cost of construction, existing property continues to be a good investment. While I do not predict the property price growth that we have enjoyed over the past decade, we will continue to see prices increase at a more controlled pace. This is reflected in research Colliers has conducted in various cities across South Africa.

The current advantage of “rental versus buy” will slowly swing with rental prices increasing and investors will realise better returns. The bottom line: this is a good time to buy – particularly if you are a cash buyer.