Q&A – Is it not time for an interest rate drop to fuel the property market? 

Q: Graham Fincham of Cape Town asks,  

Dear REImag Team

In the current ailing and struggling economic environment is there not a good reason for the Reserve Bank to drop in interest rates instead of holding them? The Reserve Bank is hellbent on keeping inflation down but is this not something that we need to fuel the property market.”

A: Professor Brian Kantor, ex-Chief Economist Investec Bank, at a recent property gathering says:

A call for at least a 1% interest rate drop is definitely what is needed to fuel the GDP and employment rate in the South African economy. The bankrupt electricity supplier Eskom is a national liability and is putting huge drag on the economy. Household spending contributes 60% of GDP spend in South Africa and the macro outlook does not offer much joy and prosperity. The Reserve Bank’s fixation on keeping inflation below 6% is working but now it needs to review this policy to bring much relief to consumers. In 2018 Consumer Price Index (CPI) inflation was at 4,7% and the forecast for 2019 is 5,2% and 5,4% for 2020. 

Treasury priorities should be to narrow the budget deficit and stabilise the national debt to GDP ratio, support restructuring of the electricity sector and reduce the immediate risks Eskom poses to the economy and the public finances Treasury also needs to renew economic growth by strengthening private sector investment, improving the planning and implementation of infrastructure projects and rebuilding state institutions. 

There is some good news for the private sector and the property industry is that Government will step up its infrastructure build programme by partnering with the private sector, development finance institutions, and multilateral development banks to create an infrastructure fund. Private sector should be building relationships with Government to build infrastructureGovernment must seek out private sector skills in the design, construction and operation of key projects to focus on their infrastructure expansion going forward. 

Government also needs to make good on their VAT refunds backlog which have previously been withheld and has had a stranglehold on the small business. The 2018 MTBS announced that SARS would pay out overdue VAT refunds which rose from R30.4 billion at the beginning of the fiscal year to R41. 8 billion to September 2018 in subsequent months. He says, the extent of VAT refunds submitted to SARS will also be influenced by general economic conditions, such as imports. 

In addition to that he says the initiative of employment tax incentives to boost job creation is a good incentive for small business and should be encouraged. From 1 March 2019 employers will be able to claim the maximum value of R1000 per month for employees earning up to R4500 monthly, up from R4000 previously.  

The key to growth is that the Reserve Bank should be targeting at least an initial 1% reduction in interest rates which can be the boost that everyone needs in the eye of austerity measures. A further drop can give just what the economy needs to boost confidence and growth in employment. 

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