Big change in Dawie Roodt’s interest rate outlook

Renowned economist Dawie Roodt said there was a change in the South African Reserve Bank’s (SARB’s) interest rate outlook, with another increase on the cards this year.

On Thursday, the SARB’s Monetary Policy Committee (MPC) decided to keep South Africa’s repo rate stable at 8.25% for the second meeting in a row.

This decision was made on the back of better monthly outcomes, which have led to a downward revision in the MPC’s forecast for core inflation to 4.9% in 2023 (previously 5.2%).

The Reserve Bank has been attempting to bring inflation down and within its target range of 3% to 6% since the hiking cycle started in November 2021.

Its efforts started to yield results in recent months, with inflation cooling since April and reaching an almost two-year low in June.

However, MPC member voting revealed that further interest rates are a definite possibility. Three members preferred to keep the rate on hold, while two wanted a 25 basis point hike.

Unsurprisingly, SARB Governor Lesetja Kganyago said tackling inflation is not yet done, and more interest rate hikes could be on the cards.

He said risks like fuel and food price inflation remain, and should they see them materialise, they “stand ready to act”.

Roodt explained that the SARB’s decisions are influenced by the United States Federal Reserve, which took a more hawkish stance with the risk of further interest rate increases.

He added that the small margin in the MPC voting signals that the Reserve Bank is not convinced that high inflation is a thing of the past.

As such, it is not guaranteed that South Africa has reached the peak of the interest rate cycle, which started in 2021.

“If you asked me six months ago what would happen to interest rates now, I would have predicted a cut in interest rates within a month or two,” Roodt said.

“I now predict that interest rates may even go up a little bit more, and we may have to wait until next year for the Reserve Bank to cut interest rates.”

Roodt now expects the first interest rate cut in the second quarter of 2024, significantly later than he predicted a few months ago.

Many analysts and economists share Roodt’s view, including Herman van Papendorp, head of investment research and asset allocation at Momentum Investments.

He said upside inflation risk remains because of sticky core inflation globally, tighter oil markets, high electricity prices, potentially high average salaries, and a depreciating rand.

“Despite an unchanged stance on interest rates, the SARB retained a cautious tone, flagging serious upside risks to the inflation outlook,” Van Papendorp said.

“The split of preferences on the committee speaks to the SARB’s ongoing fears of a resurgence in or broadening out of inflation pressures.”

“As such, we expect the SARB to maintain interest rates in restrictive territory into the second quarter of next year.”

At that point, he expects the first interest rate cut to come through in line with a sustainable shift lower in inflation towards the midpoint of the target range.

Nedbank is more optimistic, saying the SARB’s decision to keep rates steady does not come as a surprise.

“Despite the slight acceleration in the August inflation reading, it has remained within target for a second consecutive month,” it said.

It said slowing domestic demand will likely contain inflation within the 3% to 6% target range throughout the next three years.

“Shrinking retail sales, slowing credit demand, and rising arrears on loans to households suggest that the MPC has done enough to ensure inflation’s return to the midpoint of the target range,” it said.

“Consequently, we forecast no further rate hikes for this year, followed by a 100 basis point cut throughout 2024.”