Just when crazy felt like nor­mal

In­ter­est rate nor­mal­ity may feel even worse, but the real econ­omy will get on with its life

Financial Mail - Investors Monthly - - Futures Imperfect - RON DERBY

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

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