FNB commercial property finance property sector strategist John Loos said housing-related operating cost items were “troublesome” for CPI inflation. Photo: AP

PRETORIA – The weak residential rental segment of the property market has been instrumental in containing consumer price index (CPI) inflation and contributed to the low current interest rates.

However, FNB commercial property finance property sector strategist John Loos said housing-related operating cost items were “more troublesome” for CPI inflation.

Loos expects the SA Reserve Bank monetary policy committee (MPC) to leave the repo rate unchanged at its meeting this week to deliberate on interest rates.

He said the slowing in the CPI inflation rate for actual rentals and CPI for owner equivalent rentals had been important to the overall CPI because these two indices had a large combined weighting of almost 17 percent.

The CPI inflation rate for actual rentals dropped to 4.03 percent in the most recent CPI survey from a 5.7 percent multi-year high in September last year, while the CPI for owner equivalent rentals had slowed to 3.66 percent year-on-year by September last year from 5.4 percent a year earlier.

Loos said the weak housing market performance was positive for interest rates at present and was exerting downward pressure on rates but certain key housing-related cost items were more troublesome for CPI inflation.

These included the CPI for various municipal rates and utilities tariffs, he said.

Loos said the CPI for water and other services, which included municipal rates and non-electricity tariffs such as water, rose by 11 percent year-on-year in November while the CPI for electricity and other household fuels was inflating by 7.73 percent.

“The upside risk is this latter index, with Eskom applying for further double-digit tariff hikes for the next three years.

“Depending on what the electricity regulator decides, it is possible that such housing-related costs could pose some additional upside risk to CPI inflation in 2019 after already reaching rates well above the overall CPI inflation rate.

Loos added the 5.2 percent CPI inflation in November was slightly higher than the 5.1 percent recorded in October and has risen from the 3.8 percent recorded in March last year, a surge that some may argue justifies further rate hiking right now.

But Loos said certain key drivers of inflation had improved since November, notably the major drop in petrol price, while the rand had “behaved reasonably well” since the November MPC meeting, and the Reserve Bank would probably take this into account at this week’s MPC meeting.

Loos added that a decision by the MPC this week to leave interest rates unchanged would still be sufficient to keep the housing market subdued and rational.

There was no need for the Reserve Bank to do anything on the interest rate front to contain either market “exuberance” or rental market inflation, he said.

Loos said Firstrand’s economic growth forecast of 1.4 percent for this year, which was only marginally better than the estimated 0.7 percent for last year, was also not believed to be sufficient to lift average house price growth significantly.