Old Mutual Investment Group has decided to swim upstream and forecast that the South African Reserve Bank’s (Sarb) current interest rates cycle was coming to an end amid softening global inflation, and that the bank would not be increasing rates significantly going forward.
Sarb will next week announce its final monetary policy decision for the year, and a number of economists expect a 100 basis points increase in interest rates, following three consecutive 75 basis points hikes to tame inflation.
However, Old Mutual’s chief economist Johann Els yesterday said the recent downside surprise in US inflation had brought markets a sigh of relief, as the US Federal Reserve’s likely policy pivot became somewhat clearer.
Els said that global inflation has peaked and was heading lower.
“There are increasing signs that global inflation is in peak territory and headline inflation rates should roll over soon, even as core inflation remains sticky for a while longer,” Els said.
“However, inflation will take some time to get back within target and therefore interest rates are not going back to zero any time soon.”
As a result, Els said that Sarb’s interest rates are likely to peak soon and then flatten through 2023,” he said.
“We are looking at another 50 basis points in rate hikes in this cycle, maybe 50 basis points in November or 25 basis points each in November and January. That will likely be the end of this upcycle.”
Els’s forecast goes against other economists who have penned a larger interest rate hike after the Sarb’s Monetary Policy Committee (MPC) discussed the possibility of a 100 basis points hike at their last meeting in September.
Investec chief economist Annabel Bishop yesterday said although the MPC delivered a 75 basis points increase the last time, this time around it could deliver a 100 basis points lift on elevated inflation.
“South Africa’s inflation rate at the retail level has climbed to 6.9% year-on-year from figures published by Stats SA today for September from 3.7% year-on-year for the first quarter,” Bishop said.
“Sarb will be wary, balancing still high inflation with weak economic growth in the third quarter, we expect a 100 basis points increase on balance,” she said.
However, Els said the environment was therefore ripe for policy error, with this risk rising – from the US Federal Reserve in particular – which could catalyse a sharp growth slowdown or recession.
As a result, he said the impact of the interest rate hikes were yet to be felt in the economy, and thus Sarb would not want to implement too many hikes too quickly.
Meanwhile, Els said South Africa’s prospects were looking remarkably better than the global environment.
Els outlined his forecast for South Africa next year, saying he expected 2% economic growth and inflation to fall back within the target range at 4.5% by the end of the year.
“South Africa is in a far better position than when previously facing a similar set of global circumstances, with our growth story actually looking better this year, despite the flooding, severe load shedding, Transnet’s strike action and the global growth slowdown that has been battering our economy,” he said.
“The global slowdown will still take its toll on us, but it will be less severe than before.
“We should also expect lower inflation from this point, coming back within the target range by early next year; while the SA interest rates cycle is also close to the end, with the sharp fiscal improvement that we’ve seen recently, likely to drive ratings improvements,” Els said.