South Africa’s MPC Maintains Interest Rate Amid Global Trade Challenges

The South African MPC has decided to keep the interest rate at 7.5% amidst global trade uncertainties. Governor Lesetja Kganyago pointed to potential scenarios that could impact the economy. Economists had mixed expectations for a rate cut due to stable inflation data. Rising living costs pose challenges for the property market, though changes in transfer duties could stimulate activity. Investor confidence, however, remains high.

The Monetary Policy Committee (MPC) of South Africa has decided to maintain the policy rate at 7.5%, with four members supporting this stance and two members advocating for a 25 basis point reduction. Consequently, the prime lending rate remains at 11%. This decision is influenced by uncertainties in global trade dynamics and issues regarding the national budget.

Governor Lesetja Kganyago noted that the MPC assessed various external scenarios during their meeting, including a possible slowdown in the United States accompanied by a weaker dollar and increased commodity prices, particularly for gold. This scenario could yield modest benefits for the South African economy via improved terms of trade and a stronger rand, potentially leading to lower inflation and a reduced policy rate.

They also examined the implications of losing African Growth and Opportunity Act (AGOA) benefits, predicting a decline in exports and subdued growth. Incorporating tariffs on South African exports would exacerbate these effects. Furthermore, a severe scenario involving a sentiment shock would likely lead to a weaker rand and higher domestic inflation, which would necessitate a tighter monetary policy, reducing growth by 0.7 percentage points.

Ahead of the MPC announcement, economists had mixed expectations. Anticipations of a 25 basis point cut were driven by stable domestic inflation and a resilient rand. Recent domestic data, particularly low CPI figures and manageable electricity price increases, strengthened the argument for a potential rate reduction.

In a challenging global atmosphere, Kganyago emphasized the importance of continuing domestic reforms to foster growth and maintain macroeconomic stability. However, Landsdowne Property Group cautioned that the Reserve Bank’s hawkish approach, coupled with rising living expenses and an imminent VAT increase, could hinder the positive momentum in the residential property market.

Jonathan Kohler, CEO of Landsdowne, highlighted that rising living costs might affect affordability, urging potential buyers to adopt a cautious approach toward investment. He mentioned that some may choose to rent rather than purchase amidst such uncertainty, benefiting from the stability of fixed-cost leases.

Up-and-coming adjustments in transfer duties, however, could stimulate activity in the property market’s more affordable segments. Commencing on April 1, 2025, individuals purchasing properties valued up to R1.210 million will be exempt from transfer duties, enhancing affordability in lower- to middle-income brackets.

Despite concerns regarding economic growth, investor confidence remains robust. The Absa Homeowner Sentiment Index for the final quarter of 2024 indicated that 85% of investors are optimistic about portfolio expansion, marking the highest confidence level since 2016. Kohler remarked that current opportunities, especially in Gauteng, may offer considerable value as house prices have remained stagnant.

The projected GDP growth for the first quarter of 2025 is 0.4%, with an anticipated 0.5% growth for the second quarter. The MPC is expected to revisit its rate-cutting strategy in May, with potential reductions in the repo rate to 7.25% for the majority of the year.

In summary, South Africa’s MPC has decided to maintain the interest rate amidst uncertainties in global trade and internal economic challenges. While this decision mirrors mixed expectations among economists, rising living costs and potential VAT increases pose risks to investor sentiment. However, upcoming changes to transfer duties may encourage demand in specific property market segments, and overall investor confidence remains surprisingly optimistic, indicating a possibility of market expansion in the near future.

Original Source: www.zawya.com