Don’t panic, the interest rate storm will calm

BY BONNY FOURIE bronwyn.fourie@inl.co.za

Although the future can’t be predicted with 100% accuracy, the signs are pointing to inflation reaching its peak and one more hike this year before the situation stabilises

SOUTH AFRICANS have been hit from all angles this year, with the latest “klap” being last month’s 0.75% interest rate hike – the second consecutive increase.

Homeowners and buyers in particular are panicking about whether they can afford to meet their monthly bond repayments, and stressing about rates continuing to climb.

Some are even worrying about whether the country’s prime lending rate will reach the all-time high of 1998’s 25.5%, and scrambling to set up contingency plans in case they do.

But for these South Africans, the expert advice is simple: chill.

FNB predicts that there will be one more interest rate increase, in November, of 0.5%. After that, the situation is expected to stabilise. Of course, one can never accurately predict the future or all the global events that may impact South Africa’s consumer price index (CPI), but the bank’s property sector strategist, John Loos, says it seems unlikely inflation will rise more.

“Only if inflation gets out of hand, can interest rates rise far higher than the current levels.

“But to create some kind of ‘hyperinflation’ would require far more ‘proinflation’ fiscal and monetary policies than the current ones in South Africa – Zimbabwe being the most recent example of extreme inflation in the southern Africa region.

“In the near term, inflation in South Africa doesn’t appear likely to get out of hand. Petrol prices have started coming down, and CPI inflation for August, at 7.6%, was slightly lower than the prior month’s 7.8%.”

Inflation and interest rates

Unpacking some scenarios, he says, hypothetically, that even if the petrol price were to remain the same over the next 12 months, that would ultimately lower year on-year petrol price inflation to 0%. Even better though, petrol prices have started to come down.

The CPI is expected to slow again as a result, although food-price inflation has not turned the corner.

“It looks like we are hitting the peak, or are fairly close to reaching the peak of inflation. And, at FNB, we also believe that we are close to the peak of the prime rate. We think that there will be a 0.5% increase in November, but after that, the interest rate will move sideways.”

Loos does reiterate that predicting anything over the next two to five years is risky and there are “many scenarios” to consider but, ultimately, he believes the interest rate will peak at a 10.25% prime rate in 2023.

“That is FNB’s main scenario. Inflation appears to be peaking already.”

There are always risks to any forecast, and global politics could be key, especially in light of the tension between the West and China, and the West and Russia – which could lead to supply-chain disruptions. boycotts and sanctions caused disruptions of the world’s energy and food markets. And the tension is far from over.

There is also concern from some quarters that global supply disruptions could see global inflation remaining higher for longer, he explains.

“If inflation is elevated for long enough, then it risks staying higher for longer as inflation expectations anchor at higher levels, something the world’s central banks want to prevent.”

Generally, he says, it is “tough” to predict what will happen four to five years from now, “after all, we never dreamt of Covid in the months before it happened” but, at the moment, the near-term outlook for inflation, and therefore the interest rate, looks near to stabilising, especially with the petrol price coming down.

Samuel Seeff, the chairperson of the Seeff Property Group, adds that it is important to put the interest rate into perspective – it is not higher than what it was before the onset of the Covid-19 pandemic.

“We always knew that the rate would need to go up again, which means that there is no need to panic about the interest rate. In fact, the prime and base home loan rate was 10% in December 2019 and came down to 9.75% in January, just before the onset of the pandemic.

“It is important though that given the uncertainty that has crept into the economy and with the resurgence of Eskom’s power outages, property owners and prospective buyers ensure they are able to cope with the additional costs.”

Should you fix your home loan rate now?

These are Loos’s words of wisdom: “I never advise anyone to fix their rates or not. That depends on each individual’s appetite for risk.

“But fixed rates aren’t a tool with which to try to beat the market. You fix your rates to sleep comfortably at night; you fix your rates to have certainty over a portion of your cash flow. And you live with your decision, knowing that you may ‘lose’ some and you may ‘win’ some, depending on where interest rates move to in future.

“The main reason for fixing rates is because the future is uncertain.”

Interestingly, he adds, even if you are inclined to fix your rates, you should probably expect to find less attractive fixed rates on offer in an interest-rate-hiking cycle.

Banks also need to hedge their risks against taking on a client’s floating rate, and they do so in the swop market where “forward rates” and market expectations, to a large extent, determine the fixed rate a bank can offer.

If the market expects interest rates to increase, as it often does when they are being hiked, fixed rates offered will often move higher.

“You get more attractive fixed rates when the interest rates are declining or at least expected to decline.”

Loos’s tip to buyers and homeowners: If you are keen on fixing your rates, the time to look for more attractive fixed rates is often when interest rates are being cut or expected to be cut. Ironically though, this is normally the time when few people are looking to fix their rates.

As with any financial decision, Careen Mckinon and Kay Geldenhuys, of ooba Home Loans, say there are benefits and risks to fixing your rates. Households on tight budgets, with little potential income growth, could benefit in the long term from fixing their home loan rate, they say.

“And, if you are entering the market for the first time, the fixing of your rate could be a sensible option as it will provide you with protection from rate increases in the future.

The trick is taking the long-term view.

“If you believe that the interest rate will continue to go up, then it’s worth taking the short-term increase for the longer-term benefits. Right now, we are in an upward interest rate cycle, therefore borrowers should conduct a sensitivity analysis on what interest rate increase they are able to absorb.”

To sum it up, Mckinon and Geldenhuys say: “If it will give you peace of mind to be able to budget your repayments at a fixed rate into the future, then it’s a good time to fix. On the other hand, if you would like to continue to benefit from the low rate for as long as possible, and believe that the interest rate might come down in the longer term, then it’s best to wait it out, particularly if you are enjoying a very attractive variable rate below the current prime lending rate.”

Carl Coetzee, the chief executive of BetterBond, says there is no simple answer when it comes to evaluating the benefits of a fixed or variable interest rate as each buyer’s financial situation and circumstances are different.

“While it can be reassuring having a fixed rate so that you know what your instalment will be over a fixed period, especially as interest rates rise, it could end up costing you more. A fixed rate is generally higher than a variable rate as it poses a greater risk to the bank.”

To sum it up, Mckinon and Geldenhuys say: “If it will give you peace of mind to be able to budget your repayments at a fixed rate into the future, then it’s a good time to fix. On the other hand, if you would like to continue to benefit from the low rate for as long as possible, and believe that the interest rate might come down in the longer term, then it’s best to wait it out, particularly if you are enjoying a