Global Courant
After raising some hope in markets last week that rate hike cycles were about to end, central banks continued to raise rates – which will also factor into local decisions by the South African Reserve Bank (SARB). ).
Last week saw a wave of surprise rate hike decisions by international central banks, which put pressure on local markets.
Following higher-than-expected consumer price inflation (CPI) in the UK, the Bank of England surprised markets by raising its key lending rate by 50 basis points to 5%, an unprecedented level since April 2008.
According to the Bureau of Economic Research, while the BoE did not explicitly signal further increases, it also did not point to an end of the cycle after this increase.
“For now, further hikes are highly likely as swap markets now imply another 125 basis points of hikes, which would take the key rate to 6.25% – the highest level since 1998,” the BER said.
The BER said another hawkish monetary policy surprise was the Norwegian central bank’s hike of 50 basis points, instead of 25 basis points as widely expected.
The Swiss National Bank also raised its policy rate by 25 basis points and signaled that further increases were to be expected.
Adding to the mix of rate hikes, U.S. Federal Reserve Chairman Jerome Powell, in congressional testimony, reiterated the Fed’s commitment to bring inflation back to its target of 2%, saying more rate hikes this year are “probably ” are.
“All of this suggests that we are yet to see the end of the advanced economy’s walking cycle,” the BER said.
In emerging markets, Turkey’s central bank raised its interest rate to 15% last week – but the 650 basis point hike was lower than general market expectations – and the People’s Bank of China cut two key interest rates to support growth in the world’s second largest economy.
South Africa impact
The mix of directions for global interest rate cycles is one of the key factors taken into account by the SARB’s Monetary Policy Committee when setting local rates.
The SARB has raised rates in 10 consecutive meetings so far, adding 475 basis points to the cycle from November 2021.
After better-than-expected inflation data from Stats SA last week – when the CPI cooled from 6.8% earlier to 6.3% – analysts were more confident that the Reserve Bank would pause rate hikes at its next meeting in July.
However, not everyone is equally optimistic. Economists at Nedbank said the SARB has been very aggressive and rate hikes are likely to hold out for at least another meeting. The group expects an increase of 25 basis points in July.
With global central banks still firmly in control of the cycle, this could spill over into South Africa, which has its own quirks – such as tax shedding, crumbling infrastructure, blocked ports, etc. – to deal with.
What is more telling is that the tighter cycle is having a negative effect on the rand/dollar exchange rate.
After three weeks of a strengthening edge, the local currency closed at a nearly two-week low against the dollar on Friday and also lost ground against the euro and pound.
According to TreasuryOne, central banks’ aggressive stance is leading to risk aversion in markets, which has raised concerns about global growth prospects and caused investors to fall back on the safety of the dollar.
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