Bottom Line:


  • Interest rates have risen further than first anticipated. The private sector and the SARB were caught off-guard by the rise in inflation and the commitment of the Fed to reduce inflation. The Fed has not wavered and pointed out that the risk of higher inflation posed a greater risk to the economy than the threat of higher interest rates. Over the medium to longer term, that is certainly true.
  • Inflation continuously erodes households’ disposable income, so investors need to get used to elevated interest rates for longer.
  • So central banks, including the SARB, have a little further to tighten, but the good news is that we are collectively only one or two decisions away from the peak in interest rates. Furthermore, through 2023, interest rates are likely to be reduced as inflation subsides and central banks focus on supporting economic growth and engineering as soft a landing as possible.

Baseline View:


Interest rates will rise a little further, but they are close to peaking. Broad-based USD weakness is a theme that will help the ZAR appreciate well into 2023 and help reduce imported inflation and ease parity pricing pressures. Inflation is set to trend lower from here, and the pace should accelerate such that in Q3 2023, a rate cut of 25-50bp is possible.


Broad expectations:




Due to strong actions on the part of the major central banks, the SARB has felt obliged to respond. The response was driven mainly by a desire to shield the ZAR against negative speculation and to ensure that price stability remains a central feature of the monetary policy. In a sense, the SARB is taking its cue from the broader trend and aims to “buy insurance” against another calamitous event that might boost global inflationary pressures all over again.

As reflected in the accompanying chart, the QPM model has lost all its value as it has not been updated. More important will be the comparison between the ETM view vs the market. Both have revised their terminal peak in interest rate expectations higher, but both anticipate that interest rates are nearing their peak. That peak is likely to be reached in Q1 2023. After a period of stability, the interest rate cycle will turn lower.

Risk to the Outlook:



The risk to the outlook is that inflation drops faster than anticipated due to a combination of weak GDP growth, a tighter credit cycle, a stronger ZAR, and reduced global commodity prices. All of those are quite possible and will only be further enhanced by the SARB’s cautious monetary policy stance.

ETM’s internal ZAR indicators are pointing to a much stronger ZAR through 2023. The ZSI is much stronger, the ZAR is undervalued, and the carry attractiveness indicator shows the ZAR in the top quartile of a list of twenty-two countries.

The inflation rate will drop sharply as the ZAR appreciates and reduces parity pricing and imported goods inflation. The fuel price has already declined considerably, and all signs are that it has much
further to go. It ultimately implies that the chances of a rate cut are rising, and while the rest of the market is not pricing in a rate cut next year, ETM is.

A 25bp rate cut is possible in Q3 2023, with others to follow in the MPC meetings thereafter. A factor that will play a significant role in turning the overall rates cycle will be recessionary conditions that will impact the UK, the EZ and the US in H1 2023. Central banks will be forced to prioritise growth once more.


DM yield curves point to an impending recession



Yield curves around the globe have inverted convincingly as their central banks have lifted interest rates. In their commitment to reducing inflation, central banks have raised the short end of the yield curve much higher than rates available in the future.

In the future, a weaker growth environment, a tight credit cycle, and a stronger ZAR will result in disinflationary or deflationary pressures. In some DM jurisdictions, house price growth has softened, and all indications are that prices will decline. Declining house prices undermine the balance sheets of households and businesses and play a role in weakening the credit cycle.

Soft credit cycles, in turn, tend to moderate the monetary space for inflation to take hold. It is all part of a broader credit cycle that will eventually lead to rapidly declining inflation and a turn in the hawkish stance of the central banks. For the SARB, an easing in the global interest rate cycle will translate into less pressure to respond and a greater probability that domestic interest rates will decline next year.

Domestic inflation expectations starting to moderate



ETM’s inflation risk indicator offers insight into the underlying momentum driving inflation. It is clearly evident from the accompanying chart that the underlying momentum, as reflected by the blue line, has turned negative. In other words, that implies that price pressures have turned from being inflationary to disinflationary.

Should the blue line continue to drift materially lower, disinflation will give way to deflation, although given the current inflation data, this would be a long stretch to call right now.

This indicator draws much of its direction from the general changes in monetary dynamics. The higher the interest rates and the tighter the credit cycle, the greater the chance that price pressures will abate.

The indicator tells us that domestic inflation will moderate sharply over the next few months and that by the middle of 2023, inflation should be comfortably within the 3-6% inflation target range. From a SARB perspective, this is yet another indicator corroborating ETM’s projection that interest rate cuts could be announced towards Q3 and into Q4 of 2023.


The cycle in the US has also turned


The chart on the right reflects the moderation in US inflation (red line) and the path that the money supply data suggests it will take through the months ahead. The important point to note is that the growth in M2 has turned negative. Between rate hikes and quantitative tightening, the cycle has well and truly turned. And as inflation expectations have moderated, so too have interest rate expectations, with the Fed Funds futures in 2024 suggesting that rates will be lower by 75bp from where they are now, let alone the Fed hiking another 50bp at the first meeting of 2023.