Global Courant 2023-05-04 19:17:40
The South African rand strengthened on Thursday as the US dollar weakened.
The greenback took a hit against other major currencies after the US Federal Reserve hiked rates by 25 basis points, signaling a pause in the hike cycle.
The dollar fell about 0.15% against six rivals, according to Reuters.
The Fed raised its benchmark interest rate by 25 basis points on Wednesday, as expected, but also watered down the wording in its policy statement about the need for further rate hikes.
Annabel Bishop, Investec’s chief economist, reiterated that the 25 basis point increase was widely expected and noted that the Fed’s statement on the economy was more balanced and highlighted more concerns than previously a greater focus on inflation.
The Fed has now recognized a more flexible approach to monetary policy to ultimately set policy, taking into account the time lags in which monetary policy affects economic activity and inflation.
Essentially, the Fed had left the door open for an interest rate pause at the next meeting or for reaching the final rate, but it also didn’t rule out further hikes, Bishop said.
Fed Chairman Jerome Powell expressed concern over instances of weakness in the US banking system due to the impact of multiple US banks.
“Last night’s statements showed a shift in monetary policy to focus on both employment and inflation (the FOMC’s dual monetary policy mandate) from what had become a very one-dimensional focus on inflation.”
According to Bishop, high commodity prices have driven up CPI and PPI inflation in the US, while high demand added to pressures from the previous year.
Bishop said this is evident in core inflation measures that are high and proving to be sticky for the Fed, which is concerning.
“The FOMC needs to weigh these concerns against the impact of tighter credit conditions on the economy and the banking sector, particularly the latter on financial stability, although the FOMC’s concerns about high inflation are still very clear.”
On the domestic front, in response to the Fed, the rand strengthened to R18.21 on the weak dollar, slightly stronger than the previous day’s close of R18.29.
The Fed’s next key meeting is expected in mid-June, where it will provide another monetary policy update.
As it stands, it’s highly unlikely it will raise interest rates again, Bishop said.
Markets at large believe that the US has ended the cycle of rate hikes for this year and that cuts of 1.00% are likely to take place instead by the end of January next year, and that July of this year saw a decline of nearly 50%. base points will show.
Bishop added that South Africa has fully priced in a 25 bps hike for this month in terms of the country’s own interest rate cycle, citing a 34 bps hike, slightly lower than previously to 40 bps.
“By July, South African markets are currently expecting another 25 bps increase in repo rates,” Bishop said.
Local investors are now looking to S&P’s global purchasing managers’ index survey to gauge the health of the South African economy.
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