Commenting on the MPC’s decision, SEIFSA Chief Economist Henk Langenhoven said that stability in interest rates and a possible end to the upward cycle is very good news for the economy.
“Stable policies are crucial for the much-hoped for recovery of the South African economy, albeit a slow one. We are confident that the decision to keep interest rates unchanged will have a positive impact over time, largely by allaying fears of possible further increases, in the process stabilising, if not easing, debt and debt servicing burdens of households and companies,” Mr Langenhoven said.
He said that this was in line with global developments as the weak and uncertain international economic environment has led to accommodative actions by the world’s central banks and, in the process, enticed investors to seek higher yields in emerging markets.
“South Africa is already benefiting from this trend as is reflected in the inflow of funds into the local economy this year and the recent strengthening of the Rand. The positive impact of the Rand’s strength on inflation expectations cannot be underestimated,” he explained.
Mr Langenhoven said that, coupled with the latest positive news coming from certain sectors of the economy, with manufacturing being a good example, the MPC’s decision may spark further inventory rebuild in the economy and even positive investment decisions in anticipation of growth recovering.
However, he cautioned that continued weakness in international trade growth and, therefore, demand for South Africa’s export products was likely to continue to dampen export growth. For the same reason, oil prices eased again, especially since the Brexit announcement. This has also contributed to lower inflation.
Mr Langenhoven said the impact of unchanged rates on the metals and engineering sector will take time to be felt. He said that the announcement was likely to have a positive impact on consumer confidence and behaviour and may arrest the declines in car sales, which is a market for the sector’s products. He add that although the international commodity cycle appeared to be bottoming out, mining production was still declining, but at a much lower rate than before.
Mr Langenhoven said SEIFSA remained deeply concerned that demand from the metals and engineering sector was likely to remain subdued for some time, even with relief from unchanged rates.
He added that the MPC’s maintenance of the Repo rate has further benefits in other industries that link with the metals and engineering sector, such as construction.
“Construction activity is still subdued, but stable interest rates are positive in contrast to the depressing impact that a rise would have had. Although the quantum of transfer duties paid when buying a property and the value of mortgages are only early signs of recovery, both are positive at this time, being 11,2% and 5,4% higher than a year ago respectively,” said Mr Langenhoven.