FU­TURES IM­PER­FECT

Ron Derby col­umn

Financial Mail - Investors Monthly - - Contents - RON DERBY

To­wards the end of last year the script for global mon­e­tary pol­icy was cast in stone. The US had ended a six-year ex­per­i­ment in quan­ti­ta­tive eas­ing and this year was sup­posed to see the first rate rise in that coun­try in al­most a decade. The UK was ex­pected to fol­low suit as that econ­omy con­tin­ued its grad­ual im­prove­ment.

In re­sponse to a tight­en­ing en­vi­ron­ment, the South African Re­serve Bank and other emerg­ing mar­ket cen­tral lenders were ex­pected to fol­low.

That was un­til oil prices cooled quite sig­nif­i­cantly — they are down 50% since the end of June — re­duc­ing in­fla­tion­ary pres­sures across emerg­ing mar­ket economies, which have been slow­ing over the past two years.

With SA’s growth far be­low its po­ten­tial be­cause of its many con­straints, chief among them the avail­abil­ity of elec­tric­ity, the lower oil price has come as wel­come re­lief for Mon­e­tary Pol­icy Com­mit­tee mem­bers, who up un­til a few months ago were likely to in­crease in­ter­est rates.

Some econ­o­mists are now fore­cast­ing an in­fla­tion av­er­age for the year as low as 3,5%. If oil re­mains at cur­rent lev­els, there will be re­duced pres­sure on gover­nor Le­setja Kganyago and his team to con­sider a hike in the first half of the year. (In the un­likely event that the rand stages a re­cov­ery in the weeks be­fore the MPC meet­ing next month, the gover­nor may very well field ques­tions about the pos­si­bil­ity of re­duc­ing rates.)

The UK cen­tral bank gover­nor, Mark Car­ney, has also changed his tune on higher rates in that coun­try as in­fla­tion re­mains on the low side. With­out that push, there’s sim­ply no point in rais­ing rates in a coun­try that owes a large chunk of its re­cov­ery to its prop­erty mar­ket. Since Car­ney took over from Mervyn King, this will be the sec­ond time that his mes­sage — or his tone, rather — has had to change.

Across the chan­nel, the Euro­pean Cen­tral Bank has had to begin its own round of QE to boost not only growth but in­fla­tion. The re­gion is close to de­fla­tion. That should be its main con­cern, but the re­newed ten­sions around Greece and whether it will leave the union must have the cen­tral bank sweat­ing about the im­pact on the cur­rency.

The only coun­try look­ing to keep to its 2014 prom­ises is the US Fed­eral Re­serve, whose mem­bers con­tinue talk­ing up a rate rise by the mid­dle of the year. An in­crease would only strengthen the dollar as in­vestors looked for higher-yield­ing as­sets.

I am not sure a strong dollar is all too pos­i­tive for the US, no mat­ter how po­lit­i­cally strong it makes a pres­i­dent. The stronger it be­comes against its trad­ing part­ners, such as the euro, the less com­pet­i­tive its ex­ports. Though ex­ports make up only 13% of the US gross do­mes­tic prod­uct, they have been a buoy­ant part of its econ­omy. Since reach­ing an all-time record in Oc­to­ber last year, ex­ports have been de­creas­ing be­cause of the green­back’s strength.

So, with all its trad­ing part­ners look­ing to ei­ther leave rates un­changed or lower them to boost their still ail­ing economies (or in the case of the UK to boost in­fla­tion), one won­ders whether mes­sages out of Wash­ing­ton will change as the year drags on.

Mon­e­tary pol­icy in 2015 is as un­clear as it has been since Novem­ber 2008, when the Fed­eral Re­serve adopted its un­con­ven­tional mon­e­tary pol­icy. It is still a very un­cer­tain world.

Should oil not stage a stronger re­bound than it al­ready has over the past month and should the rand hold steady (as it is un­likely to strengthen in the near fu­ture, given con­cerns around power ca­pac­ity), then the Re­serve Bank should keep rates on hold.

There are many sce­nar­ios to play with, which tells me the cen­tral bankers’ role in inspiring growth in the global econ­omy is now surely at its end. They have more than enough prob­lems on their hands. The struc­tural weak­ness of economies such as ours need to be dealt with by gov­ern­ment, the pri­vate sec­tor and unions.

Mon­e­tary pol­icy has pa­pered over the cracks for as long as it pos­si­bly could. The tools are a spent force.

Re­newed ten­sions around Greece and whether it will leave the union must have the cen­tral bank sweat­ing

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