The FNB House Price Index growth moved sideways in February, averaging 3.8% y/y. Price growth appears to have stabilised in the last few months, likely due to the receding supply of properties on the market for sale. The on-going Russia-Ukraine conflict could pose downside risks to the domestic housing market. If sentiment is significantly dampened as a result, then our expectations of a continued recovery in affluent segments in 2022 may, likewise, be dampened.
After raising interest rates by 25 basis points (bps) in January and March, the Monetary Policy Committee (MPC) continued its policy rate normalisation path and increased rates by 50bps at their May meeting. This was in line with consensus expectations, but more aggressive compared to our base expectations. Four members voted for a 50bps increase while a single member preferred a less aggressive 25bps hike. As explained in last week's report, the risk of a 50bps was always on the cards - our Taylor rule analysis showed that the SARB was falling behind the curve. We delve into the thinking around the interest rate change and forecasts.
Next week Thursday, the South Africa Reserve Bank's (SARB) Monetary Policy Committee (MPC) will deliberate on the level of the repo (policy) rate. Our base case is for the MPC to continue with incremental increases of 25bps, versus the Bloomberg consensus forecast of 50bps hike. We acknowledge the material risk of a 50bps hike, especially after two MPC members favoured a 50bps hike at the March MPC meeting, versus three members who voted for 25bps. Here we advance two compelling cases, one for a 25bps hike and another for a 50bps hike.
Following the easing of lockdown and improved mobility, people have reverted to the cities. This has broadly resulted in rising rental inflation. While the latest rental inflation reading of 4.4% y/y in the US has outpaced the longer-term average of 2.9% (since 2010), rental inflation in SA remains muted. SA rental inflation has increased from the lockdown-induced trough of 0.6% y/y in March 2021 to 1.9% in March 2022. However, rental inflation in SA remains well below the pre-pandemic average of 3.9% (since 2018 when housing inflation started to moderate broadly in line with structurally slowing headline inflation).
After troughing at 2.1% y/y in May 2020, due to a lockdown-driven fall in demand and statistical imputations, headline inflation accelerated to 5.2% y/y in May of 2021. CPI weights are typically updated at least every five years, in line with international standards. New weights will be introduced with the January 2022 data and the base year will change to December 2020.
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