Just when crazy felt like normal
Interest rate normality may feel even worse, but the real economy will get on with its life
Moving away from the most accommodative global monetary policy since World War 2 to something resembling normality was never going to be easy. That’s why markets have been so skittish over the past year, if not longer.
We know that normalisation has to take place, but no-one is quite sure what will topple over when the US Federal Reserve, as the custodian of the world’s reserve currency, decides to raise rates in that country. There’ll be a price to pay for that and I think it will be felt in financial markets more than in the real economy.
For Fed chair Janet Yellen, it’s not that easy to ignore the louder and much more immediate response that markets give to any shifts on the monetary policy dials. Headlines about collapsing stock markets never make for easy reading for any politician, no matter the greater good.
So I wasn’t surprised by the Fed’s statement last week that rates might rise more slowly than initially expected. It might still be before the end of the year, but the message is clear that this is going to be a very delicate balancing act.
There’s a very recent precedent of a central bank being too quick to raise rates when growth wasn’t exactly settled. The European Central Bank, strongly influenced by the German concerns over inflation, chose to raise rates in 2011, and quickly had to backtrack as the economy stuttered.
Not something that Yellen wants on her hands, especially with a presidential election around the corner in the US.
The Fed’s move to reassure markets that normalisation won’t mean yanking off the “Band-Aid” of cheap money in one go has boosted the rand. It had previously weakened quite dramatically because of all the positive US economic data, showing signs of a recovery from the first quarter.
Despite the rally, the rand is still trading around lows last seen more than a decade ago and inflation is at its highest this year, with the threat of a further rise in the figure. The data suggests that the central bank governor, Lesetja Kganyago, and his team might be tempted to react at the next MPC meeting next month.
We’ve heard the warnings that the tightening cycle is here. July may be too soon, given the Fed statement, which has somewhat reduced the pressure, but in September we may see the first rate rise since July last year. I may as well qualify this statement: this depends on how well the currency holds up in the weeks leading to the July meeting.
There may be another rise by the last meeting of the year in November, especially if the Fed finally bites the bullet.
Savers will finally be able to celebrate, while spenders — who are in the majority — are going to find it more difficult.
It won’t be a train smash; I am not too sure there is anything that monetary policy here or in another part of the world can do to support growth. If our already low borrowing costs haven’t led an investment drive by businesses of all shapes and sizes, and in turn stronger growth, a moderate rise in them won’t be as detrimental as we think. Nor will it significantly strengthen the rand.
With the US economy on a much more assured footing and the magical doses of liquidity seemingly working across the Atlantic in Europe, our exports could be set for a boost. This is even more so with the weaker rand.
(The black swan event that could spoil this is an untidy end to Greece’s debt crisis, which as I write this is still a distinct possibility.)
In a report earlier this month, the Reserve Bank said it would follow a moderate tightening path in monetary policy that wouldn’t cause “too much harm” to economic growth.
The path is as clear as ever and care will be taken not to kill off the little growth there is locally in the real economy and, in the case of Yellen, not to dramatically slow growth in the world’s biggest economy.
The question that will be answered when this normalisation is allowed to take root is how weaker markets will affect confidence levels of major businesses. Will still struggling share prices encourage a search for growth or a refocus on efficiencies?
It’s an answer that will tell us just how long this tightening cycle is likely to last.
Despite the rally, the rand is still trading around lows last seen more than a decade ago