Futuregrowth Asset Management, one of SA’s biggest institutional bond investors, expects the Reserve Bank to start cutting interest rates towards the middle of next year to help boost demand in the economy.
While the asset manager acknowledges the potential upside risks to the inflation outlook from the El Niño weather pattern and pass-through costs associated with rolling power cuts, it argues underlying demand from consumers is still tepid, as reflected by prevailing core inflation, which strips out volatile energy and food prices.
“We share the [Reserve Bank’s] concerns about the near-term upside risk to consumer prices but believe the 8.25% repo rate marks the peak of the current interest rate cycle, with a prolonged pause to follow,” Futuregrowth said in a note on Tuesday.
Futuregrowth’s projections align with those of economists who expect the central bank to ease policy in 2024 in line with receding inflationary pressures.
The Bank expects average inflation to be 5% in 2024 before easing to the 4.5% midpoint of its target band in 2025.
The global environment has also become more favourable for emerging markets after the US Federal Reserve signalled a potential cut in rates in 2024.
The implied US policy pivot played out in the compression of US government bond yields, exemplified by benchmark 10-year notes that stood at 3.90% on Tuesday versus 5% on October 19.
The asset manager said November marked a turning of the tide for the ‘Great Repricing’ of developed market bonds.
“Notwithstanding the strong labour market, the sharp post-Covid-19 ascent in US real rates was halted by continued evidence of cooling consumer price pressures and a watchful, data-dependent Fed which seems increasingly likely to have played its last act in this interest rate cycle when it hiked the upper-bound of the federal funds target rate to 5.5% in July,” Futuregrowth said.
“In the eurozone, weak underlying macroeconomic growth conditions and cooling price pressures also strongly suggest that the 25-basis point increase in the deposit facility rate in September to 4% marked the last in a cumulative 450 bps interest rate hiking cycle.”
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