South African interest rates should fall sharply in 2003, with inflation subsiding more rapidly than is widely expected, fund managers Citadel said in a quarterly presentation on Wednesday.
Citadel’s Chief Investment Officer Dave Mohr told reporters he expected the CPIX index targeted by the central bank for its monetary policy to fall back within its three to six percent target range by the middle of next year.
This would allow the Reserve Bank to reverse two of the three hikes in interest rates seen in 2002, which were each a full percentage point, he said. Those moves took its repo rate to 12,50% and commercial lending rates to 16%.
”We will probably see two of the hikes reversed, with the first cut in the first half of 2003,” he said.
”It is our view that CPIX will peak in the middle of the second half of 2002 at close to 11% but be back within the target range by the first half of next year. The big surprise will be how quickly it comes down.”
News on Tuesday that the annual increase in the CPIX index — which excludes mortgage rates — had surged by 9,8% in June, well beyond expectations, has cast doubt on perceptions that interest rates will stay steady for the rest of 2002.
Some economists also fear that expected cuts in interest rates next year will not materialise, which would be bad news for an economy growing at a relatively sluggish pace and saddled with an unemployment rate of 30%.
Mohr acknowledged there was a risk that the central bank would raise rates again in 2002, if over the next few months it focused solely on the momentum of rising inflation generated by a steep plunge in the rand late last year.
But he said that falling global equity prices, the rand’s recovery this year and low international inflation should remove pressure for further hikes.
Citadel Investment Strategist Jan van Niekerk said the company was wary of domestic equities after their dramatic outperformance so far this year, and viewed conventional government bonds as an ideal investment.
Citadel expects long-term bond yields to fall by two percentage points to 9,5% in the next couple of years. – Reuters