Peter Brooke 00:00
Good day. I'm Peter Brooke, a Portfolio Manager at the Old Mutual Investment Group. This is Macro Perspective 47 of 2021.
00:08
And I want to talk about interest rates. Last week, the South African Reserve Bank hiked rates by 25 basis points to 3.75%, carried by a three to two vote. This was a little bit faster than Johann Els, our economist, expected, but was in line with the fact that the rates had largely dropped, and the next move was up. Realistically, a 25 basis point move is unlikely to make a huge difference. But is interesting as an indicator of future policy.
The move was definitely not driven by domestic demand driven inflation. And in fact, the South African Reserve Bank reports that the risks of the medium-term growth is to the downside. While inflation expectations were largely unchanged, the Reserve Bank hiked its inflation - its headline inflation forecast by 10 basis points to 4.3% in 2022, and 4.6% in 2023, very much in line with the midpoint of the range between 3 and 6%. Globally, while inflation is high, the next move will be lower as base effects kick in.
01:13
So, why exactly did they hike? The reason is because the South African Reserve Bank sees current rates as too low, or in their words, policy accommodation remains high. And it's true that rates at three and a half percent are extraordinary. They're the lowest since I was born, in fact. This was in response to Covid and as Covid fades, the SARB is keen to normalize.
01:45
What is interesting is that this is very much an emerging market phenomenon, while developed cap central banks have preferred to run even easier monetary policy to ensure growth recovers and have kept rates very accommodative. Emerging market central banks do not have that luxury and have been actively hiking, leaving South Africa as a laggard. For instance, in the last year, Brazil has hiked by 575 basis points, Russia by 325, Czech by 250 basis points, and all of Peru, Hungary, and Poland by more than 1%.
02:24
In this new world of money printing, there is a stark contrast between the rich developed world, which can print money, and the emerging markets who have to remain prudent. Despite all these rate hikes, emerging market bonds have weakened, offering higher spreads relative to developed market bonds and the US dollar has strengthened. So much like the equity market, it is better to go for growth than to go for yield.
I hope you enjoyed this perspective. Until next week.