Allan Gray shares 2024 interest rate prediction

Allan Gray is pencilling in a short and shallow cutting cycle for South Africa, with the repo rate only coming down by 1% to 7.25% by the end of 2025. This would still be 1% higher than pre-Covid levels. 

This is feedback from the portfolio manager of Allan Gray’s money market fund, Thalia Petousis, who outlined why a more restrictive rate is necessary. 

Over the course of 2023, the South African Reserve Bank (SARB) raised the repo rate from 7% to a 14-year high of 8.25%. 

In the first Monetary Policy Committee (MPC) meeting of 2024, the governor of the SARB, Lesetja Kganyago, said there are serious upside risks to inflation. 

The inflationary risk factors appear more muted than those that have weighed on the local and global economy over the last two years. Thus, it is sensible to expect a rate-cutting cycle to begin soon. 

However,  it will be short and shallow given US rates likely to be higher for longer and structural constraints within the South African economy that drive up the level of prices, Petousis said. 

Chief among Kganyago’s concerns are high and unpredictable local food prices caused by elevated levels of load-shedding, logistics bottlenecks, and animal diseases.  

Food inflation is difficult to predict, but Petousis said the upside risks are far less extreme than they were in 2022 and 2023. 

Kganyago also remains concerned regarding the inflationary impact of load-shedding and the logistical constraints at local ports and along Transnet’s rail network.  

While these constraints have the capacity to continue to raise the local cost of production, the caveat is that the damage should be more muted than it was in 2023.  

He has also repeatedly warned of the significant impact on economic growth from these structural economic issues. 

Geopolitical tensions also present risks to inflation, such as the Red Sea attacks lengthening global shipping times. 

The impact of these supply-chain shocks should be on a far smaller scale than in 2022. 

However, Petousis warned that a third of all global container shipping passes through the Suez Canal, and the rerouting of trade jeopardises the “just in time” delivery model. 

This could represent a transitory upside risk to the inflation forecast if the supply of finished goods dwindles or becomes more costly. 

Large US auto manufacturers have already announced they will idle capacity during February because of these delays, with some resorting to far more expensive air freighting.

Thus, she expects the SARB to begin cutting interest rates in mid-2024 in line with its quarterly projection model. 

Although this model is merely a policy suggestion, it pencils in a short and shallow cutting cycle with the repo rate dropping from 8.25% to 7.25% by the end of 2025. 

Given the Reserve Bank’s mandate to maintain price stability and expectations for higher and stickier global inflation, a restrictive rate is far more necessary than in the past, Petousis said.