Big shift in interest rate expectations for South Africa

While markets reflect simmering uncertainty over the path forward for interest rates in South Africa, fund managers are convinced that the country has hit its peak, and the next move from the Reserve Bank will be a cut.

Bank of America's (BofA) latest Fund Manager Survey shows that investors are confident that the South African Reserve Bank won't hike rates again.

This represents a complete shift in expectations from just a month ago, where 79% of fund managers polled by the bank expected the 'next' repo move (in July) to be upwards.

Ahead of the July meeting, most analysts were anticipating another 25 basis point hike in the interest rate, given South Africa's still-high inflationary environment, combined with a weaker global market position.

However, after inflation showed a much bigger decline than anticipated in June - and the rand staged a solid recovery - South African debt holders were met with some relief in the form of a hold on rates.

The central bank's monetary policy committee in July paused its longest phase of monetary tightening since 2006, leaving its policy benchmark at 8.25% after raising rates in its ten prior meetings to bring cumulative increases to 475 basis points since November 2021.

Fund managers now overwhelmingly believe that the 'hold' now signals the end of the rate hike cycle, with 80% anticipating the next move from the SARB to be downwards, with consensus pointing to the first quarter of 2024 as the cut.

The bullish outlook on interest rates comes amid "jitters" in the market, emanating from comments made by Deputy SARB Governor Fundi Tshazibana last week, where she warned that South Africa's hike cycle may not yet be over.

Speaking to BloombergTV, Tshazibanas said central bank remains concerned by the risks to the inflation outlook and may resume hiking interest rates if they materialise.

"We've been very clear this is not a solid pause because the risks remain significant," she said, pointing to double-digit food price inflation and the impact of higher-than-planned electricity price hikes in 2023, which feed into various sectors.

According to economists at the Bureau for Economic Research (BER) these concerns aren't unwarranted.

The BER pointed to this week's inflation print as being vital to ease "jitters around the near-term South African interest rate path", especially given how the rand has come under renewed pressure in recent weeks, adding pricing pressure to imports.

However, while inflation is expected to be higher month-on-month - around 1%-1.2%, based on the electricity tariff hikes that came into effect in July - the year-on-year rate is expected to be much lower, given the high base of July 2022.

"In line with the consensus, we see a further easing in the annual rate of change for headline CPI. Indeed, in our view, CPI will take another notable leg down to 4.9% y-o-y in July, from 5.4% in June," the BER said.

According the BofA Fund Managers Survey, most investors anticipate inflation numbers to keep sinking, while a net 6% expect South Africa's economy to 'get a little stronger' this year.

As has been the key trend for much of 2023 (and beyond), the country's infrastructure issues - Eskom and Transnet in particular - have been flagged as the biggest risks to the economy and all bullish.

A weak earnings backdrop follows this - exacerbated by these issues - political instability, policy uncertainty shifting more to the left, and weaker consumer numbers as the perfect storm continues to batter household spending.