Top Economist Predicts Interest Rate Drop in SA

Interest Rates to Drop Soon

An article published by Realestateweb predicts that interest rates will begin to fall fast from later this year, according to a top economist. Inflation is set to drop more than it has risen and is expected to be back in the South African Reserve Bank’s target range of 3-6% by the time the 2010 World Cup kicks off.

What this means is that you can expect interest rates to start falling later this year, putting some of the purchase power back into the pockets of already struggling consumers. This breath of optimistic fresh air comes from FNB’s chief economist, Cees Bruggemans, who spoke at the annual Rode conference on property in South Africa, held in Stellenbosch on Monday.

The FNB economist is not alone in his thinking that the worst of the interest rate saga is over. Just last week, investment strategist for Investec Securities, Brian Kantor said that R157 (a government bond) was shedding important clues that the worst could certainly be over for interest rates.

Bruggemans believes that Reserve Bank Governor Tito Mboweni may well press the pause button at the next Monetary Policy Committee meeting. Mboweni has used interest rates as the primary tool to manoeuvre towards his target of 3-6%. Bruggemans’ analysis indicates that the first interest rate cut might come in December, which means a prime interest rate of 15% by the end of the year and a prime interest rate of 13% by the end of 2009.

However, he went on to emphasise that his view is dependent on a number of variables, which include the oil price not producing another shock. Since June, the oil prices and agricultural prices have dropped due to the stability of the rand. Lower than expected economic growth, with a sacrifice in large parts of the economy already being advanced, is also a factor.

The current account deficit at 9% of Gross Domestic Product is extremely worrying, as this places South Africa as a high-risk country from the perspective of foreign investment and might easily produce a withdrawal of funds.

“We are running a high interest rate defence policy and it has worked to this day,” said Bruggemans, in light of the rand’s value. “The nice folks at StatsSA are making a few imaginative changes…that is really knocking inflation down,” was Bruggemans’ comment about changes to national inflation measures. “We are suddenly looking at an inflation projection that goes down faster than the rise ever was. That starts between now and November,” he said.

The R157 was trading at a yield of 10.9% in June and recently, it has been trading around 9.3%. According to Kantor, these figures are in “recognition” that the South African Reserve Bank won’t push interest rates any higher. The bond’s market reaction reflects the notion that SARB has come to the end of its interest rate hiking.

Dries du Toit, of Dries du Toit Consult CC agreed with Kantor, saying that the bond yields “act like a barometer” and indications are that they have been falling over the past five weeks. “People price listed property on the back of bonds. Since November [listed property] fell by 35% up to the first week in July. Already it has turned around and increased by 15%,” du Toit said at the Rode conference.

Du Toit went on to say that, “If we are successful in getting interest rates down, the future will exceed all our expectations. I’m not talking about house prices, but commercial, direct and listed property”. He said, “No one rings a bell at the bottom. Ding-a-ling-a-ling – we have already seen the bottom in listed property prices”.

According to du Toit, listed property may not be a “super buy”, but it is still a buy, while he believes that there is still worse to come for the residential property market.

The information in this article is courtesy of Realestateweb (“Interest rates to come down fast – top economist”, 11 August 2008).

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