The announcement will be welcomed by pensioners who rely on interest, but will likely be to the detriment of the housing market which seems to have entered a recovery phase.
A home loan of R1m payable over 20 years requires a monthly repayment of approximately R8 678 at an interest rate of 8.5%. At a rate of 9%, the monthly repayment will increase by R319 to R8 997.
John Loos, household and property sector strategist at FNB, says for the residential property market, this interest rate hike is seen as a negative for growth in demand, thus likely to have a containing impact on house price growth. “All bets are off regarding any noticeable rise in house price growth compared to recent levels, and single-digit price growth is expected to remain a characteristic through 2014.”
Vehicle payments are not affected as much. A financed amount of R200 000 over a period of 54 months will require a monthly repayment of approximately R4 552. The interest rate hike will increase the monthly payment by R48 to R4 600.
Speaking at the announcement of the Monetary Policy Committee’s interest rate decision, Reserve Bank Governor Gill Marcus said although the initial response in global financial markets to the announcement of tapering in the US has been fairly muted, emerging markets have subsequently experienced a high degree of turbulence.
“In the longer run a sustained recovery in the US should be positive for the global economy in general but the adjustment to the withdrawal of quantitative easing is likely to create significant short to medium-term challenges.
The inflation outlook deteriorated significantly since the previous monetary policy committee meeting and is now expected to be 0.6 percentage points higher this year at 6.3%. The outlook for 2014 has also been revised upwards with 0.6 percentage points to 6%.
The Sarb expected inflation to breach the upper end of the target range in the second quarter of this year and to peak at 6.6% in the fourth quarter before declining to 6% in the second quarter of 2015.
The outlook for economic growth also remains subdued. While growth of 1.9% is expected to be announced for 2013, growth expectations for 2014 and 2015 have also been revised downwards from 3% to 2.8% for 2014 and to 3.3% from 3.4% for 2015.
Marcus said notwithstanding this increase in the repo rate, monetary policy remains accommodative.
The Reserve Bank’s decision follows similar rate hikes in other emerging markets such as Turkey and India.
The rand depreciated sharply after the announcement and was trading at R11.27 to the dollar shortly after 16:00, 3.1% dollar than its prior day close. It weakened 3.1% to R18.64 to the pound and 3.1% to R15.39 against the euro. The All Share index shed 0.2% to 45 629 point while the Top40 declined by 0.2% to 41 017 points.
Retail shares also saw a sudden decline. Woolworths (-4.38%), Mr Price (-3.72%), Truworths (-3.2%), Foschini (-3.63%), Shoprite (-3.87%) and Pick n Pay (-1.14%) all retreated sharply.