Futuregrowth Asset Management thinks the Reserve Bank’s interest rates have peaked at 8.25% and will be cut after a prolonged pause towards the middle of 2024.
Futuregrowth is one of South Africa’s largest institutional bond investors and specialises in fixed-income investments.
Although the Reserve Bank monetary policy committee (MPC) members unanimously voted to retain the repo rate at 8.25% in November, the accompanying policy statement remained decidedly hawkish, Futuregrowth’s note to clients said.
This is justified by inflation expectations that remain anchored above the mid-point of the 3% to 6% inflation target band and inflation risks in the medium term.
Chief among these risks are load-shedding, logistical bottlenecks, and the forecasted El Niño weather pattern.
These locally-based risks indicate that the Reserve Bank may lag central banks in other countries, which will begin cutting rates in early 2024.
Thus, Futuregrowth expects a prolonged pause before rate cuts in the middle of 2024 to give the Reserve Bank time to see how those risks play out.
The Reserve Bank expects inflation to average 5% in 2024 before easing to the 4.5% midpoint of its target in 2025.
Futuregrowth’s projections align with economists who expect the central bank to ease monetary policy in 2024 in line with receding inflationary pressures.
The asset manager’s expectations are also primarily in line with the Bureau for Economic Research’s (BER’s) Inflation Expectations Survey for the fourth quarter of 2023.
The Reserve Bank commissioned the BER to conduct a quarterly survey to measure inflation expectations and other macroeconomic variables related to inflation.
Four social groups are covered: analysts, businesspeople, senior representatives of trade unions, and households.
In the fourth quarter, average expectations for 2023 remained unchanged at 6.1%.
However, respondents expect inflation to be 5.7% in 2024 (up from 5.5%) and 5.6% in 2025 (up from 5.3%).
This upward revision was driven by business people and trade unionists increasing their forecasts while analysts held theirs virtually unchanged over the forecast horizon.
The five-year inflation expectations forecast ticked from 5.1% to 5.2%, mainly driven by trade unions raising their forecast and a marginal increase from analysts.