Why South Africa's high interest rates are stifling private sector investment

The real interest rate remains far too high to spur meaningful capital investment by South Africa’s private sector, despite the recent interest rate cut by the South African Reserve Bank (SARB).

The bank’s Monetary Policy Committee reduced the repo rate by 25 basis points last week. 

While the news brought some welcome relief to property owners, it was another disappointment for the country’s real economy, said Renier Kriek, the managing director at Sentinel Homes.

“The SARB has consistently preached that their policy bible contains only one chapter, titled ‘inflation targeting’, which requires sticking to within their  3–6% inflation target band and anchoring inflation expectations at the 4.5% midpoint.

“Their messaging has consistently and unfailingly pledged that their mandate is the only consideration that guides their decisions,” Kriek said.

South Africa is unfortunate not to have a stable interest rate environment - a scenario that is likely to continue for at least the next five years, according to Tyson Properties.

“We spent the last couple of years straight after Covid seeing record lows and a little mini property boom. When those rates began to increase, people found that they could no longer afford the houses they had bought. We struggled to sell houses because expectations were too high.

"Interest rates began to level off, and the market picked up again. Then along came Trump and markets became nervous again,” said Tyson Properties CEO, Chris Tyson.

Kriek said that despite inflation remaining low over an extended period, currently sitting at 2.8%, leaving the opportunity for a softening of monetary policy wide open, the SARB had not budged.

Kriek asked then why the SARB has stubbornly refused to reduce the interest rate accordingly, even as inflation hovers at or below the bottom of their target band?

Despite preaching vague and opaque ‘risks to the upside’ to justify their hawkishness in recent years, he said it is clear that the SARB has been disingenuous.

He said this was made plain for the first time last week with the interest rate cut, but it has long been evident that there is a secret driver of their decisions.

“It was clear with the announcement that the SARB’s policy bible has contained a new chapter, which is their anticipated future mandate, and they have already been guided by that expanded gospel, despite the existence of the chapter having been secret and further despite the content of the chapter not having been agreed to with Treasury and other stakeholders,” Kriek said. 

The argument advanced by the Monetary Policy Committee, by way of Governor Lesetja Kganyago’s statement and answers to questions during the press conference, is that the MPC wishes to deliver a decisive blow to inflation in the long term, transforming the SA economy to a low(er) inflation economy.

This will also mean lower interest rates for longer in future, per the MPC’s reasoning, since lower inflation economies generally tend to have lower inflation rates.

“However, the question is, why do we want to do this now?” Kriek asked.

“Moving to a lower inflation target will likely have long-term positive consequences for the SA economy, but it will also involve near-dated discomfort. Essentially, the MPC is promising short-term pain for long-term gain.”

“The SA economy is a very frail patient at the moment, and keeping interest rates at current high levels in order to achieve longer-term outcomes is a risky gambit.

"We should at least be asking, and this is as much about political calculation as economic policy, whether we should not attempt monetary stimulus first, getting the economy out of its bandages, and attempt the MPC’s incisive reforms once the patient is back on its feet.

”The property sector has shown signs of broad-based recovery, with price lines across all the metros trending upwards in Stats SA’s latest Residential Property Price Index," he said.

The cumulative 75 bps cuts, with a further cut at last week’s meeting, have already had the effect of bringing previously pent-up demand spilling into the residential property market. However, while these are green shoots, the market is still under significant strain.

According to National Credit Regulator(NCR) statistics, home loan delinquency is up by 35% in the last three years, signifying the tremendous pressure households are experiencing related to their finances.

“This sharp increase in delinquency will come home to roost soon, as a sudden influx of distressed stock in the market is likely to drive prices down in the face of relatively tepid demand,” Kriek said.

The conditions for a robust rate cut were said to be ideal, given the remarkably low inflation, which, despite the recent benign increase to 2.8%, is still comfortably below the SARB's 3-6% target range. Additionally, despite global volatility, the strengthened rand poses no risk of igniting an inflationary spiral, given the subdued demand-side pressures.

The prevailing economic environment is said to be a pivotal juncture, there is nothing more critical right now than economic growth and job creation.

“Lowering borrowing costs would stimulate business investment, and crucially, put more money back into the pockets of consumers, thereby boosting spending, said Samuel Seeff, the chairperson of the Seeff Property Group. 

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