You're listening to Strictly Business Podcast with Lindsay Williams. The World Central Banks have been very active in the last part of January 2025. We've had the Bank of Japan, they raised rates, but we're not going to talk about them. We're going to talk about a couple of others. We had the ECB and they cut rates by 25 basis points. But what I want to focus on is the U.S. Federal Reserve's Federal Open Market Committee and also the South African Reserve Bank's monetary... policy committee.
They both had meetings and with me to review this monetary policy activity is Ruan Naidoo, who's a portfolio manager at 91 in Cape Town. It's been an interesting year, Ruan. Welcome, by the way. And there's been a sort of a shift. A year ago, everyone said, thank goodness inflation is coming down and thank goodness we're going to get cuts across the board. The emphasis has shifted slightly, don't you think? Hi, Lindsay. Thank you very much for that introduction.
Yes, certainly there has been a shift in the emphasis from the FOMC. And I think this shift really took place in the December meeting last year where Fed Chair Jerome Powell made the statement that we were entering a new phase of monetary policy. And after the January FOMC meeting, it's become clearer that this new phase could probably best be characterized as. wait and see mode. The Fed is clearly in no hurry to move interest rates after having cut 100 points last year.
And our view is that going into the March FOMC meeting, we're likely to see them remain on hold. Yes, the market seems to be saying that there's a possibility of a cut in June, whereas before we were talking about three, maybe even four cuts in 2025. That was the feeling last year.
Is it because of... the so-called stickiness of inflation or are there other factors as well the the fed chair jerome paul has characterized inflation um very positively uh he seems to be very dovish in his view on where inflation is heading and he seems confident that it's going to reach the target but there are risks to that outlook and those risks stem specifically from u.s policy They mention tax policy, immigration policy, they mention tariff policy, as well as regulation.
And it's the difficulty to distill this into an inflation and growth outlook that is keeping them cautious, in my opinion. It's very interesting because what he's doing is almost second guessing the new president, the 47th president of the United States of America. You know who? Donald J. Trump. So he's saying, well, if the tariffs come into force and, for example. They are threatening, as we pre-record this on the Friday.
On the Saturday, they're saying there's going to be 25% increases on goods coming from Canada and Mexico. So Jerome Powell's saying we can't do anything until we know what the story is. And the other thing in this rather long question for you, Ruan, is that Donald J. Trump was furious with the fact that interest rates did not come down. And he posted something quite nasty. on his Truth Social media platform. A little bit dangerous, I think.
Yes, it is definitely a worrying development in terms of Fed independence and central banking independence in general. I was pleased by the response that Jerome Powell gave in his comments at the press conference, basically trying not to comment very much with regard to... Donald Trump's policy or the new administration's policies. How this really impacts inflation expectations is the main point of consideration.
And at this point, we're starting to see some of these inflation expectations begin to take up. So if you have a president calling for artificially low interest rates, we've seen what that has done in many developing economies around the world. It is not a good space for central banks. No, it's not. One of the great things about South Africa, Ruan, is that the South African Reserve Bank has always, in my opinion, behaved responsibly, independent and at times rather conservative.
But I think it served the country well. What did the South African Reserve Bank say after their decision to cut rates by 25 basis points? Yes, agreed. Certainly the South African Central Bank, the SARP, has tremendous credibility in the marketplace. Yes. And that institutional strength is one of the key features that keeps South African ratings higher than otherwise. The South African Reserve Bank... did decide to cut interest rates by further 25 basis points yesterday.
However, this was done in a split vote. Two members of the committee prefer to have held interest rates steady at this meeting, which potentially means that we are now going to be in a pause or on hold period for a period of time, while we also wait for our reserve bank to get a better grip on on the outlook from the United States. Yes, how does the RAND factor come into play here as well? The RAND has been, and it was threatening to go to all-time lows fairly recently against the US dollar.
It's steadied a bit now, but if the US dollar starts to rally because of the Jerome Powell stance on not cutting rates as many times as many people thought, and the dollar strengthens even more, and the RAND weakens even more, do you think... that is in the back of Liceche Cognago's mind? Oh, certainly. In fact, the central bank had actually indicated a scenario in which we would see a 10 percentage point tariff on all imports into the US and some sort of retaliatory measures by other countries.
And under that scenario, our monetary policy committee projects that the RAND could depreciate to nearly 21 RAND to the With that kind of a depreciation, the estimates is that inflation locally will reach 5%. And perhaps somewhat comfortingly, the policy rate would only trend higher by half a percentage point on the back of that type of scenario. So that's the precise sort of estimates that the Reserve Bank has provided us with regards to the tariff war.
Okay, so in summary, we've had the Bank of Japan raising rates. Very, very slightly, but still a raise it was. The ECB cutting rates, the South African Reserve Bank cutting rates, and the US Federal Reserve leaving rates on hold. What does that mean for you, for income investors? What does it mean for your strategy at 91? This kind of environment with evolving interest rates, macro volatility, really does suit active strategies.
For example, diversified income fund, which is seeking to both participate in rallies in bond markets, markets, which we are likely to get in the event that inflation is lower and we do not see the kind of tariff impacts some are predicting.
But also on the other side, the Diversified Income Fund is seeking to protect capital in difficult environments of risk of the kind of potential environments we would see if tariffs are implemented and some of the more onerous policies of the United States comes through. Okay, but no massive changes given what we've seen at the end of January, but just maybe a tweak here and there? Yes, we had participated in the rally in interest rates during the course of last year.
So we have reduced our interest rate exposure on the funds slightly. We have increased some of exposure to dollar assets on the back of the potential for the dollar to strengthen. And I should. we see tariff announcements come through. In our property building block, we spent much of last year, the latter part of last year, overweight in South African property names, given some of the risk premia that was going to be expected to come out of prices.
And we have subsequently switched some of that exposure into offshore names going into this year. Interesting times, Ruan. Thank you very much for your analysis. That was Ruan Naidoo. portfolio manager and 91 in Cape Town. The views and opinions expressed in these podcasts are those of Lindsay Williams and various contributors and do not reflect the policy, position or opinion of any other agency, organisation, employer or company associated with StrictlyBusinessPodcast.com.
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