Fed's dovish stance allows emerging markets to breathe sigh of relief

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US Federal Reserve Chairperson Jerome Powell. (Photo: Alex Wong, AFP)
US Federal Reserve Chairperson Jerome Powell. (Photo: Alex Wong, AFP)
  • The Federal Reserve Bank has kept its rates steady and announced no changes to its bond-buying programme.
  • The Fed is sticking to its accommodative monetary policy stance, which has helped ease pressures on emerging markets - like South Africa - to hike rates, says an economist.
  • The South African Reserve Bank may hold off hiking rates this year, say economists.

The dovish stance of the Federal Reserve Bank signals that emerging markets, like South Africa, have less pressure to hike rates, according to an economist.

The US Federal Open market Committee met this week and decided to keep interest rates steady, near zero. It has made no changes to its bond-buying programme, Bloomberg reported.

The Fed noted that inflation is expected to rise, but affirmed that monetary policy is accommodative given poor employment figures in the US. In a market note, Investec economist Annabel Bishop said the Fed's dovish tone has reduced pressures on emerging markets. The "sanguine" tone of the Fed regarding inflation also signals that emerging markets have less pressure to hike rates, even if inflation pushes up, she added.

"With the Fed fully supportive of the continuation of its monetary policy measures to promote economic recovery, while highlighting the risks to the downside, this is likely to continue to underpin commodity prices, and so lend support to the rand," said Bishop.

The rand started Thursday at R14.24 to the greenback and held steady around the same level in the afternoon. The rand had made considerable gains against the dollar over the past 12 months, Bishop noted. Market sentiment has turned from being risk-averse during 2020, amid the uncertainty of the Covid-19 pandemic.

Bishop said the South African Reserve Bank may ignore upcoming sharp inflation, which is attributed to base effects and commodity price increases, the latter of which is driven by global economic recovery.

Bishop had previously said the Monetary Policy Committee (MPC) could hike interest rates as early as May. But recent developments such as the rand strength, stability in commodity prices and dovish monetary policy globally may see the MPC keep rates on hold. Maintaining steady rates may result in a better outcome for sentiment in the business sector and household confidence and would aid recovery in the domestic economy, Bishop added.

A hike of 25 basis points in the repo rate may do little to derail economic growth. "However, given the extreme fragility of SA's recovery, as many businesses and jobs have been lost, sentiment is key too," said Bishop.

In its Monetary Policy Review released earlier in April, the SA Reserve Bank said that global inflation is expected to tick up as the world economy recovers. The bank expects domestic inflation to lift, but remains around the 4.5% midpoint of the 3% to 6% target range.

In a report on quarterly perspectives issued this week, Absa's researchers said that inflation would remain subdued despite "cost-push" pressure from fuel and electricity tariffs. It highlighted that muted wage inflation might contribute to keeping consumer inflation within the target range. Inflation in 2020 averaged 3.3%, the lowest annual average since 2004.

Absa noted that markets have priced in the start of hiking cycles only next year. Domestically, markets have priced in the start of a normalisation cycle from the second half of this year. It highlighted that the MPC would unlikely hurry toward policy normalisation. "We believe the low inflation outlook gives the SARB the policy space to continue to focus on the ongoing growth recovery, particularly given the lingering uncertainty about the durability of the recovery and the extent to which some of the damage of the pandemic shock is temporary or permanent," the report read.

Absa sees rates being kept low for long. The repo rate could be kept on hold at 3.5% for the remainder of the year, it said. Absa does not expect any rate hikes until March 2022, Fin24 previously reported. Increases amounting to 75 basis points are possible, followed by 50 basis points in 2023.

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