Momentum Investments have released their report based on SARB held repo rate steady amid lingering inflation risks prepared by the Momentum Investments Macro Research Team.

Highlights

• The Swiss National Bank (SNB) reduced interest rates by 25-basis points in March 2024, making it the first major central bank to cut interest rates. In another pivotal interest rate decision in March, the Bank of Japan (BOJ) raised interest rates for the first time in 17 years. After the move by the BOJ, there are no countries with negative policy rates globally.

• The pace of global interest rate cuts is gaining momentum. There were 33 cuts implemented year-to-date (1 January to 26 March 2024) compared to only 10 cuts in the same period last year according to Cbrates.

• South Africa’s (SA) weak economic growth of 0.6% year-on-year (y/y) in 2023 matched the SA Reserve Bank’s (SARB) forecast. The SARB expects economic activity to rise by 1.2% in 2024 (unchanged), 1.4% in 2025 (up from 1.3%) and 1.6% in 2026 (unchanged). The risks to its growth projections were assessed as balanced and supply- side constraints are expected to ease.

• Loadshedding is better than last year but still elevated, with unplanned maintenance (breakdown failures) still a concern. The SARB estimates that loadshedding could detract 0.6 percentage points from growth in 2024 compared to 1.5 percentage points in 2023.

• The SARB raised its headline inflation forecast for 2024 slightly to 5.1% (5% previously). The projections for 2025 and 2026 were kept unchanged at 4.6% and 4.5%, respectively. The SARB noted that risks to the inflation outlook are skewed to the upside. The identified risks include higher services inflation, higher food prices due to intensifying El Niño conditions, pressure on the rand and elevated inflation expectations.

• Encouragingly, inflation expectations for the different time horizons retreated in the Bureau for Economic Research’s (BER) inflation expectations survey for the first quarter of 2024. Most notably, the two-year ahead expectations drifted lower to 5.3% from 5.6% owing to lower expectations by businesses and trade unions.

• Core inflation was revised up to 4.8% in 2024 (previously 4.6%). The projections for 2025 and 2026 were kept unchanged at 4.6% and 4.5%, respectively.

• The Monetary Policy Committee (MPC) unanimously decided to keep the repo rate unchanged at 8.25% for the fifth consecutive time, in line with the Reuters median consensus.

• President Cyril Ramaphosa reappointed the Governor (Lesetja Kganyago) and Deputy Governors (Fundi Tshazibana and Dr Rashad Cassim) for another five-year term each, commencing when their current terms end. Dr Mampho Modise was appointed as a new Deputy Governor effective 1 April 2024. From the May 2024 meeting, the MPC will be made up of six voting members.

Two major central banks pivot in March

Five major central banks (the United States (US) Federal Reserve Bank (Fed), European Central Bank (ECB), Bank of England (BOE), BOJ and SNB convened in March to announce their respective interest rate decisions. Major shifts during March were the interest rate cut by the SNB and the interest rate hike from the BOJ. The other three central banks kept interest rates unchanged.

As reported in the Financial Times, the SNB was the first major central bank to cut interest rates in 2024. The SNB decreased interest rates from 1.75% to 1.5% in March against market consensus for rates to be kept on hold. Bloomberg attributes the decrease in interest rates to the central bank’s concerns about Swiss currency strength as the other major central banks gear up to cut rates, as well as lower inflation projections. The SNB revised its inflation expectations downward and inflation is expected to remain sustainably below the 2% target over the medium-term which supports the decision to cut rates.

The ECB also revised its inflation expectations lower in March 2024 relative to its December 2023 projections. Despite the downward revision, inflation is expected to average above the 2% target in 2024 and only move closer to target in 2025. The ECB decided to keep interest rates unchanged and reiterated its commitment to bring inflation down to target. According to the Bloomberg median consensus, the ECB is expected to start cutting rates in the second quarter of 2024.

The US Fed unanimously decided to keep the federal funds target range unchanged at a range of between 5.25% and 5.5% at the March 2024 meeting. The March dot plot (a chart that summarises the Federal Open Market Committee’s (FOMC) outlook for the federal funds rate) indicates that nine of the 19 FOMC participants see a cumulative 75-basis points reduction in interest rates by the end of 2024 (median consensus). This is in line with Bloomberg’s median consensus on 25 March 2024, with the first cut expected in the second quarter of 2024. The other members’ inputs into the dot plot are leaning towards fewer cuts this year which indicates that risks are skewed to prolonged tight monetary policy.

The BOE also kept interest rates constant at 5.25% at the March meeting. The votes were less hawkish than the previous meeting. Eight members voted to keep rates unchanged, while one member voted for a cut. According to The Guardian, the March 2024 meeting was the first meeting since September 2021 where no member preferred a hike.

The BOJ increased interest rates from negative 0.1% to a range of 0% to 0.1%. This marks the first interest rate increase in 17 years and a move away from the negative interest rate era. The decision to increase rates in March was driven by wage pressures on the back of higher inflation. According to Reuters, major companies in Japan agreed to the highest wage increase in 33 years in March. Higher wages could support household spending and place upward pressure on consumer prices. This means the BOJ may need to respond to curb price pressures in the near term, but the central bank emphasised the need to maintain accommodative monetary policy. The BOJ also abandoned the yield curve control framework and discontinued the purchase of exchange traded funds and Japanese real estate investment trusts.

Since the start of the year, market expectations of the timing and magnitude of interest rate cuts by major global central banks have been revised from an earlier start to a delayed and shallower interest rate cutting cycle. Nevertheless, global central banks, including SA, are expected to pivot towards monetary policy easing in 2024. According to Cbrates, many central banks globally are already cutting interest rates. There were 33 cuts and 12 hikes implemented year-to-date (1 January to 26 March 2024).This is a stark contrast to 10 cuts and 58 hikes in the same period last year.

Supply-side constraints to growth expected to ease

SA’s economic growth was largely flat at 0.1% quarter- on-quarter (q/q) in the fourth quarter of 2023. Economic stagnation persisted in 2023 as the economy grew by 0.6% y/y according to the production method (in line with the SARB’s January forecast) and 0.7% y/y according to the expenditure method.

Economic activity in the first quarter of 2024 seems to be off to a slow start based on January data and the decline in the Rand Merchant Bank (RMB)/BER business confidence index for the first quarter. Real retail sales were down 2.1% y/y, real wholesale trade sales contracted by 5% y/y and mining production was 3.3% y/y lower in January 2024 compared to a year ago. These are indications that financially strained consumers, lower commodity prices and structural issues such as loadshedding and logistics continue to weigh on economic activity. Encouragingly, manufacturing output was up by 2.6% y/y in January. Despite weak activity in January, economic growth is expected to lift in 2024 compared to 2023.

The SARB’s forecast for economic growth in 2024 was left unchanged at 1.2% (see chart 1). This is slightly above our estimate of 1%. The SARB expects growth to pick up to 1.4% in 2025 (previously 1.3%) and 1.6% in 2026 (unchanged). We have a more optimistic growth estimate over the next two years at 1.7% in 2025 and 1.8% in 2026.

‍

Risks to the growth outlook were assessed as balanced and supply-side constraints are expected to ease.

Loadshedding is anticipated to be less of a drag on economic growth in 2024 due to increased generation capacity and lower demand for Eskom power. The latest forecast from the SARB reveals that loadshedding could detract 0.6 percentage points from growth in 2024 and 0.2 percentage points in 2025. These estimates are noticeably lower than the 1.5 percentage points impact in 2023. In our view, the high levels of unplanned maintenance (albeit declining) remain a risk (see chart 2). The Electricity Regulation Amendment Bill was passed by the National Assembly in March 2024. The bill supports the unbundling of Eskom and aims to establish a competitive market for electricity among other things. This is a positive step towards addressing the energy crisis in the long-term. However, the bill still needs to be considered by the National Council of Provinces (NCOP) before it can be signed into law.

Logistics constraints are reported to be gradually improving. According to Africaports, rail container operations between Durban and Johannesburg are fully operational but still experiencing limited restrictions on capacity. In terms of ports, the waiting times at the Cape Town, Port Elizabeth and Ngqura Container Terminals are reported to be stable. The Durban Container Terminal Pier 2 is still reported to be experiencing significant delays and Pier 1 waiting times have also deteriorated.

Risks to the inflation outlook assessed as to the upside

Since the start of 2024, inflation has accelerated to 5.3% y/y in January (from 5.1% y/y in December 2023) and rose further to 5.6% y/y in February. This was mainly due to higher fuel prices and the surge in medical insurance inflation in February. Core inflation ticked up to 5% y/y in February on the back of higher medical insurance inflation after five consecutive months of being around the midpoint of the inflation target range.

Looking ahead, we expect upside inflationary pressure in March from a large fuel price hike. The SARB revised its fuel inflation forecast up to 1.4% in 2024 from the previous estimate of 0.6%. This was predominantly due to upward revisions for the first quarter (4.8% from 1.7%) and the second quarter (3.7% from 3.1%). Thereafter, fuel inflation is expected to ease. In the March 2024 Short-Term Energy Outlook, the US Energy Information Agency (EIA) revised its Brent crude oil price estimate up to an average of US$88/bbl for the second quarter of 2024 (the previous forecast was US$84/bbl). The agency expects higher oil prices due to falling oil inventories on the back of the extension of oil production cuts implemented by the Organisation of the Petroleum Exporting Countries (OPEC+). The SARB kept its Brent crude oil forecasts unchanged over the medium term.

Intensifying El Niño during February and March 2024 poses an upside risk to food inflation in the coming months (see chart 3). The SARB lowered its food inflation forecast for 2024 to 5.5% from 5.7% at the January meeting (see chart 4). This was driven by the lower food inflation prints in the first two months of 2024 which led the SARB to revise its food inflation forecast for the first quarter of 2024 down to 6.2% (previously 6.9%). The uptick in food inflation from drier and hotter weather conditions was accounted for in the third and fourth quarter estimates.

A further risk to inflation stems from the undervalued rand. According to the SARB, the rand is under pressure from interest rates being higher-for-longer in major economies, weakening terms of trade and rising uncertainty as the country heads to elections.

Against this backdrop, the SARB moderately increased its headline inflation forecast for 2024 to 5.1% (previously 5%). The forecasts for 2025 and 2026 were kept unchanged at 4.6% and 4.5%, respectively (see chart 5). We see inflation averaging 5.4% in 2024, 4.5% in 2025 and 4.7% in 2026.

The SARB highlighted that headline inflation is expected to continue to moderate but at a much slower pace. At the January 2024 meeting, inflation was estimated to be sustainably around the midpoint of the inflation target range from mid-2025. Amid lingering inflation risks, headline inflation is now expected to only reach the midpoint of the target range at the end of 2025.

On the back of the upside surprise in February’s core inflation rate, the SARB has revised its core inflation forecast up to 4.8% in 2024 from the previous estimate of 4.6% (see chart 6). The forecasts for the next two years were kept unchanged at 4.6% and 4.5%, respectively. The SARB noted that the surge in medical insurance inflation took services inflation to its highest level since 2019. The bank further cautioned that “this suggests SA is joining the global trend of services, rather than goods, becoming a major source of inflation.”

Despite the acceleration in inflation in the months leading up to the BER’s survey of inflation expectations, inflation expectations retreated in the first quarter of 2024. The expected average inflation for 2024 was revised down to 5.4% (previously 5.7%) and to 5.3% for 2025 (previously 5.6%). Inflation is expected to average 5.2% in 2026. Importantly, the retreat in inflation expectations was driven by businesses and trade unions (price setters of the economy). Businesses and trade unions expect inflation to average 5.4% in 2026 (see chart 7).

While it is positive that the price setters of the economy are bringing down their inflation expectations, these agents expect inflation to moderate at a slow pace and settle well above the mid-point of the inflation target range, which is a risk to the inflation trajectory.

MPC unanimously decided to keep the repo rate unchanged

The MPC members unanimously decided to keep the repo rate unchanged at 8.25% for the fifth consecutive meeting in March 2024 (see table 1). The announced decision matched the Reuters median consensus where all 23 surveyed analysts forecasted that rates would be kept constant.

The decision to keep the repo rate unchanged was accompanied by a more hawkish tone compared to the previous interest rate meeting.

On 15 March 2024, President Cyril Ramaphosa announced the reappointment of Lesetja Kganyago as the Governor of the SARB for a third term. Nomfundo (Fundi) Tshazibana and Dr Rashad Cassim were reappointed as Deputy Governors for second terms. Dr Mampho Modise was appointed as a new Deputy Governor, effective 1 April 2024, following the resignation of Kuben Naidoo in November 2023. The governor and deputy governors have been appointed for five-year terms each (see members’ terms in table 2). The appointment of Dr Modise takes the number of MPC members up to six.

The March MPC meeting took place with five MPC members and the composition of six voting members will start from the May 2024 meeting. An even-numbered MPC introduces the risk of a split vote whereby the governor would need to exercise two votes to determine the outcome. This is particularly a concern given that SA is heading towards a change in monetary policy direction (from a tightening to an easing cycle). In the January 2024 interest rate setting meeting, the governor highlighted the preference for an odd number committee and noted that there is an intention to appoint a seventh member.

SARB more cautious on rate policy

The uptick in inflation in the first two months of 2024 following two consecutive months of lower inflation supports the governor’s previous statement that the arrival of one swallow does not make a summer. At the March interest meeting, the SARB reiterated the need to see a sustainable downward trend in inflation before moving towards interest rate cuts. Given upside pressures to inflation in March due to fuel prices and possibly higher food price inflation in the coming months due to drier weather conditions, the SARB will likely continue to keep rates on hold at the May interest rate meeting. An additional consideration will be the direction and magnitude of inflation expectations moving forward.

We believe there is still scope for interest rate cuts in 2024, possibly from the second half of the year. There is, however, a risk of a shallower rate cutting cycle than our previous forecast of 75-basis points worth of cuts in 2024. The SARB’s Quarterly Projection Model (QPM) projects the repo rate at 7.72% by the end of 2024 (higher than 7.54% in the January forecast). The model predicts additional cuts in 2025 with the repo rate ending at 7.37% next year and stabilising around that level in 2026 (see chart 8).

Greylisting and GFECRA

Questions around SA’s greylisting and progress on the decision made to utilise the Gold and Foreign Exchange Contingency Reserve Account (GFECRA) were raised.

The following points were noted:

Greylisting:

- The SARB is optimistic that SA will get off the Financial Action Task Force (FATF) greylist in 2025 because the bulk of the technical requirements have been addressed.

- The elections are not expected to interfere with efforts to get off the greylist because the institutions involved are removed from politics.

- There are still areas of vulnerability.

GFECRA:

- Funds have not been transferred to the National Treasury yet. The Appropriation Bill, which is currently in parliament, needs to be passed first before funds can be transferred to Treasury.

- The SARB plans to expand the liquidity surplus. This is a way to encourage the commercial banks to keep excess liquidity with the SARB so that the money supply in the system does not increase markedly.