|The SA Reserve Bank’s (SARB) Monetary Policy Committee (MPC) yesterday announced a hike of 50 basis points in the repo rate to a level of 7,5%. As a result, all the major commercial banks announced that their lending rates, i.e prime and mortgage rates, are to increase by the same margin. |
The main reasons put forward by the MPC for this rate increase, according to Absa in a June 9 media release, include various inflationary pressures, such as high oil prices, which led to an increase of R1,00/litre since December last year, increasing food prices and a weakening rand exchange rate.
The under-recovery on 95 octane unleaded petrol is currently around 40c/litre, which implies a further increase in petrol prices in July.
Other factors mentioned in the MPC statement were the increasing debt levels of households as a result of continued strong credit extension, as well as the huge deficit on the current account of the balance of payments.
The Reserve Bank now expects CPIX inflation to break through the upper target limit to reach a level of 6,2% in the first quarter of 2007. At the previous MPC meeting the expectation was still for CPIX to peak at just below 5% before moving to lower levels again.
Although Absa expected interest rates to remain unchanged until October this year, it did express the view of a risk that the MPC could lift rates at yesterday’s meeting, taking into account the abovementioned inflationary pressures and factors such as strong credit growth, high levels of debt and the current account deficit.
If the current inflationary pressures and other negative factors are to persist into the second half of the year, Absa now believes it is quite possible that interest rates may increase further before the end of the year.
In view of an expected increase in interest rates in October this year, instead of in the first quarter of 2007, Absa’s projection with regard to nominal growth in property prices was dropped from 12,1% earlier this year to 11,5% before the rate hike.
However, in view of the increase in rates now being brought forward to June this year, together with the possibility of a further increase in rates later this year, the property market is expected to slow down even further.
As a result, we expect nominal growth in house prices to come in at about 11% for the full year, taking into account that average house price growth of 13,8% was recorded in the first five months of the year. For growth in house prices to drop to a level of below 10% in 2006, prices must decline sharply over a wide front before the end of the year. This is not a scenario that we currently contemplate.
Mortgage advances growth, currently at 30,1% year-on-year, will most probably also slow down in the second half of the year from current levels, and growth of between 20% and 24% can be expected by year-end, depending on future interest rate movements, compared with the 27,6% recorded in 2005.
In view of the ratio of household debt to disposable income at relatively high levels (68% in the first quarter of 2006 compared with 65,6% in the fourth quarter of 2005), the higher interest rates imply that debt servicing costs will increase at a faster pace. Many consumers will now ask the question if it is time to fix the rate on their mortgage loans. This, however, says Absa, will depend on individual circumstances.
As already mentioned, there is the possibility that rates may increase further this year by,
say, another 50 basis points in either August or October, which will bring prime and variable mortgage rates to 11,5% before the end of the year.
Banks’ fixed mortgage rate offerings will most probably also adjusted upwards after yesterday’s rate increase. Factors such as the future prospects for interest rates, as well as the period of a fixed rate loan, the loan amount and the loan-to-value ratio, will determine the level of fixed rates and thus the consumer’s appetite for a fixed rate on his mortgage.
Consumers, property investors and speculators living on the edge may well decide to go for a fixed rate under the current circumstances, which will limit the negative impact of further interest rates increases, if and when they occur.