The next Monetary Policy Committee meeting is likely to allow a 0,5% drop in the bank interest rate - but, says Bill Rawson, chairman of Rawson Properties, the cut should be at least 1% if any significant change in the economy, the growth rate, job creation and in residential property sales is to be achieved.

He says several interrelated factors now point to the need for a cut of this size.

The first of these is the disappointing GDP growth rate which is far lower than most economists predicted. This lack of growth can in large part be attributed to a serious lack of credit and funding, over regulation of industry and commerce and a dire shortage of technical and commercial skills in the vast majority of the population.

“It was expected that the growth rate would reflect the R93 billion spent on the provision of facilities and the running of the World Cup and on making the event the success it was. However, the current GDP growth rate is only 3,2% and, although President Zuma and others appear to think that a 7% growth rate by the end of next year is possible, most economists would agree that without the stimulus of long-lasting, cheaper credit this is simply unrealistic. A 1% cut is now, therefore, a necessity.”

The argument in favour of such a cut, says Rawson, is strengthened by the latest price index rate, which, again, is far lower than most economists predicted. (The CPI has recently come in at 3,7%).

“It has been said that the effect of excessive countrywide wage increases and the greatly increased electricity costs will raise the inflation figure - but at 3,7% we do have a considerable margin to play with and the risk of increased inflation will have to be lived with.”

Looking at the credit supply situation, Rawson says that the banks, with their hands tied by the National Credit Act, are still unwilling or unable to lend money at anything like the required rate. What is more, if they do come up with loans, the conditions attached to them are often on such difficult terms that they cannot be accepted.

In the housing sector the number of bonds issued has dropped by almost 50% and Rawson believes it is time that the criteria of the National Credit Act were reviewed.

On the regulation issue, says Rawson, over regulation is now evident in many industries and the pendulum has swung too far in favour of labour. What is more, the labour forces of South Africa are by and large insufficiently skilled and therefore unproductive.

“Despite this they are able to ruin the investor confidence locally and internationally and challenge the government with ongoing countrywide strikes. All this poses a serious threat to the government which must be aware that it is heading for trouble. Let us be quite clear on this: the loss of orders in the motor industry as a result of strikes is just one of the inevitable results that will follow from labour being now too powerful. Every other industry will feel the effect and from overseas sources it is clear that there is already a serious lack of international confidence.”

Discussing the skills issue, Rawson says that private enterprise must be given tax relief for ongoing training.

“Apprenticeships are no longer in fashion, but as the educational system in South Africa is on the whole inadequate, many jobseekers will require one to five years of training if they are to become really useful. This was one of the objectives of Services Seta, but so far it has not achieved great success.”

In China, by contrast, says Rawson, 70% of school leavers in the free enterprise zones have been trained for jobs by the time they are 18. Additional ongoing training with their employers and a total lack of strikes makes them very productive.

“A 1% drop in the interest rates would probably give a further 10% to 15% of middle class South Africans the ability to qualify for a bond and become homeowners. It would also facilitate a much needed revival of the home renovation and home improvement industry.

“Those of us in property sales know that the demand is still there, but what month after month many people lose heart and give up the ambition of becoming homeowners because they no longer believe they will qualify for bonds. This has to be changed.”

He says regular renovations and upgrading of properties have traditionally been part of the South African housing scene, and are always good investments provided homeowners don’t overcapitalise – but the lack of funding has hit this market too.

He says South Africa can probably look forward to far better growth than most of the First World countries which, in his view, will struggle for at least another five to 10 years before they can really claim to have left the economic collapse right behind them.

Herschel Jawitz CE of Jawitz Properties has welcomed the latest inflation data as a real opportunity for the Reserve Bank to cut interest rates again at the September meeting on Thursday.

“The Reserve Bank’s mandate to use interest rates to curb inflation on the upside is clear and the converse should apply as well. This is especially relevant now, given global economic recovery concerns and to some degree the impact in short term of the public sector strike. At 3.7%, inflation is now at the bottom end of the target range and the full effect of the increase in electricity prices should be accounted for. Even if inflation starts to move upwards there is still scope for the Reserve Bank to be brave and cut rates.”

He says a rate cut will have short term and long term implications for the residential property market, which has a follow-on effect for the economy. In the short term a cut in interest rates will improve demand and buyers’ ability to get a mortgage. A drop in rates will also help to stem the flow of distressed properties the banks are dealing with and which are still coming onto the market.

“More disposable income in people’s pockets may go some way to lowering the number of repossessions and for the bank’s impairments on the mortgage book. All of these factors in the medium and long term bode well for the sustainability in the recovery of the property market and by implication the economy.

“You only have to look at how sensitive the US financial markets are to the housing market, to realise how strong the overall impact of residential property is on the economy. The wealth effect and impact on consumer confidence of home ownership and a firm residential market cannot be underestimated. The Reserve Bank must understand this and make a statement with an interest rate cut in September,” says Jawitz.

Bruce Swain, managing director of Leapfrog Property Group, believes that a further rate cut is necessary to make homes more affordable and cement long-term stability.

“Consumers are still in debt and liquidity remains a significant challenge. As consumers start working their way out of debt to regain a semblance of financial stability, they are hesitant to make the commitment to get back into long-term debt again. It remains a double-edged sword for many. Although property prices have stabilised and are likely to increase over the next six months people also realise we are nearing the bottom of the interest rate cycle and can probably expect increases in the first half of 2011.”