Rand flexes after US rate hike decision

South Africa’s rand firmed on Thursday as the US dollar weakened.

The greenback took a blow against other major currencies following the US Federal Reserve hiking rates by 25 basis points and signalling a pause to the hike cycle.

According to Reuters, the dollar was down about 0.15% against six rivals.

On Wednesday, the Fed raised its benchmark interest rate by 25 basis points, as expected, but also watered down the language in its policy statement about the need for further rate hikes.

Investec’s chief economist Annabel Bishop echoed that the 25 basis point hike was widely expected and noted that the Fed’s statement on the economy was more balanced, highlighting more areas of concern versus previously showing a greater inflation focus.

The Fed has now recognised a more flexible approach to monetary policy to ultimately firm policy while taking into account the lags in which monetary policy affects economic activity and inflation.

Essentially the Fed had left the door open for a pause in interest rates at its next meeting or the terminal rate having been reached – but it also did not rule out further hikes, said Bishop.

Chairman of the Fed, Jerome Powell, raised concern over instances of weaknesses in the US banking system front following the fallout of multiple US banks.

“Last night’s statements showed a shift in monetary policy to focus on both employment and inflation (the FOMC’s dual monetary policy mandate) from what had become a very uni-dimensional focus on inflation.”

According to Bishop, high commodity prices pushed up the US’s inflation CPI, and PPI inflation, with high demand pulling pressure from the year before – both have since subsided substantially, but second-round effects have become entrenched.

Bishop said this is evident in measures of core inflation which are elevated and proving sticky for the Fed – raising concern.

“The FOMC has to balance these concerns against the impact of tighter credit conditions on the economy and banking sector, particularly the latter for financial stability, although the FOMC’s concerns over high inflation are still very apparent.”

On the domestic front, reacting to the Fed, the rand strengthened to R18.21 on the dollar weakness, slightly stronger than the close of R18.29 the day before.

The Fed’s next determining meeting is expected in mid-June, where it will deliver another monetary policy update.

As it stands, it is highly unlikely that it will hike interest rates again, Bishop said.

Markets at large believe the US has ended its rate hike cycle for this year, and that cuts are likely instead, of 1.00% by the end of January next year, and that July this year will see close to a 50bp drop.

Bishop added that South Africa has fully priced in a 25 basis point hike for this month in terms of the country’s own rate cycle with a 34 basis point hike indicated, slightly down from closer to 40 basis points.

“By July, South African markets currently expect another 25bp hike in the repo rate,” said Bishop.

Local investors are now looking to S&P’s global purchasing managers’ index survey to gauge the health of the South African economy.

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Rand flexes after US rate hike decision