Repo rate hike – Analysts weigh on its impact on business, agriculture and property market

Debt Consolidation and Debt Review: What You Need to Know

The South African Reserve Bank’s decision to increase the repo rate by 50 basis points (bps) to 4.75% means that small businesses will likely have to absorb costs in the short term, as their profit margins are already under pressure due to rising fuel prices and power cuts.

“Given the direct impact of higher interest rates on cash flow and SMEs’ ability to borrow, many businesses will benefit greatly from the recently launched Bounce Back Loan Scheme, which will have a tangible positive impact on the growth and development of South Africa’s vital SME sector,” explained Andiswa Bata, Co-Head, SME at FNB Commercial.

“The Bounce Back Loan Scheme initiative is more important than ever for SMEs in terms of long-term economic recovery.

“It will assist SMEs in recovering from the financial impact of the Covid-19 pandemic lockdowns, July 2021 civil unrest, and recent floods in KwaZulu-Natal.”

Repo rate hike impact on agriculture

Meanwhile, Paul Makube, Senior Agricultural Economist at FNB Agri-Business, said that the Rate hike bites into farming margins as policy normalization gains momentum

“The Reserve Bank Monetary Policy Committee has decided to hike the repo rate by 50 basis points to 4.75% as of the 20th of May 2022,” he noted.

“This immediately raises the cost of debt and farmers therefore face increased debt servicing costs which will erode profit margins.

“The sector has been facing huge input cost pressures due to the war-induced escalation in fertilizer, herbicides, pesticides, and fuel prices.

“Total agriculture debt stood at R191 billion in 2020 which has increased with an annual compound growth rate of 10.4% in the past five years.”

Makube added that harvesting of summer grains and oilseed crops has begun and will garner pace in the near term and the rising fuel costs will increase the cost of operations.

“Further, with fertilizer prices having increased sharply in 2022 farmers will be forced to increase their debt requirements in preparation for the new planting season and subsequently higher debt costs due to rising interest rates,” he explained.

“Nonetheless, the agriculture outlook is still positive for the year ahead.”

Repo rate hike impact on property market

John Loos, Property Sector Strategist at FNB Commercial Property Finance also said that a more significant 50 basis point hike, after 3 x 25 basis points’ worth of rate hikes at prior meetings, leads us to expect that we may see some renewed slowdown in sales activity in the commercial property sector in the 2nd half of 2022, while recent declines in vacancy rates may stall on the back of a stalling in demand growth for new commercial space.

“We also expect this ongoing rate hiking to keep average commercial property capital value growth at low single digits, translating into negative growth in real (inflation-adjusted) terms,” Loos described.

“We expect the pace of new residential development activity to slow in the 2nd half of 2022 in lagged response to interest rate hiking already implemented, and with further hiking anticipated.

“Finally, we believe that the residential rental market may continue some moderate strengthening, this component of the residential market typically benefiting from moderate interest rate hiking as a portion of aspirant home buyers choose to delay their purchase and take up rental space instead.”

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