Herman van Papendorp – Head of Investment Research & Asset Allocation at Momentum Investments, Tshiamo Masike – Economic Analyst at Momentum Investments, and Sanisha Packirisamy – Economist at Momentum Investments

Highlights

• The number of global central bank interest rate hikes in 2023 almost halved from 367 in 2022 to 160 in 2023 and we saw a rise in the number of interest rate cuts. More interest rate cuts are expected in 2024 globally in response to cooling inflationary pressures.

• The United States (US) Federal Reserve Bank (Fed) and the European Central Bank (ECB) kept their key interest rates constant at the December 2023 meetings. The Fed has started to discuss interest rate cuts while the ECB is still maintaining a hawkish tone in response to persistent price pressures.

• South Africa’s (SA) economic activity contracted in the third quarter of 2023 and exposed fragility in the economy. Domestic growth is expected to improve but remain weak in the fourth quarter of 2023. The SA Reserve Bank (SARB) has subsequently revised its growth forecast for 2023 down to 0.6% (previously 0.8%). The SARB expects economic growth to tick up to 1.2 % in 2024, 1.3% in 2025 and 1.6% in 2026.

• The SARB assessed risks to the medium-term domestic growth outlook as balanced but flagged the logistics and energy crises as factors limiting growth. The return and planned return of large power plants (Kusile and Medupi) increases the grid’s electricity generation capacity which provides a potential upside to economic growth.

• The annual average headline inflation rate of 6% in 2023 was significantly better than 6.9% in 2022 but remained elevated at the upper limit of the inflation target range (3% to 6%). Risks to the domestic inflation outlook were assessed to the upside. The identified risks included a weak rand, geopolitical tensions, climate change, food prices, higher average salaries, elevated inflation expectations as well as energy and logistics constraints.

• The SARB kept its forecast for headline inflation (CPI) in 2024 constant at 5%. The assumption of inflation stabilising at the midpoint of the inflation target range (4.5%) was shifted from 2025 to 2026.

• The SARB expects core inflation to remain anchored around the midpoint of the inflation target range. Core inflation is expected to be 4.6% in 2024 (unchanged) and 2025 (previously 4.5%) before moderating to 4.5% in 2026.

• The rand was the fourth worst performing emerging market currency against the US dollar ($) in 2023. In our view, the rand will likely remain under pressure in the near term due to loadshedding, logistics constraints, fiscal concerns and the upcoming SA general elections.

• International oil prices are expected to remain stable in 2024 but geopolitical tension presents upward oil price pressures.

• The SARB revealed that the decision to keep the repo rate constant at 8.25% for the fourth consecutive time was unanimous. The January meeting was concluded with five Monetary Policy Committee (MPC) members, with the introduction of David Fowkes following his appointment as an advisor to the governors earlier in the year.

• The governor emphasised that the committee would need to see a discernible trend that inflation is moderating toward the midpoint of the target range and inflation would need to remain sustainably low before they consider cutting rates.

• We maintain our view that the SARB is nearing the end of the hiking cycle and we forecast the first interest rate cut to be implemented in the second quarter of 2024, at the earliest. We forecast a total of three interest rate cuts for 2024, ending the year at 7.5%.

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