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Central Banks consider rate changes in the week ahead

Global indices managed to reprieve their beating at the end of last week after a hint of more monetary easing from European Central Bank President, Mario Draghi, at his regular press conference on Thursday. At the same time, crude oil bounced from 12-year lows.

The week ahead is sure to reveal further clues on the condition of the global economic picture, with more central bankers confessing their stance through monetary policy decisions.

On Wednesday, the U.S. Federal Reserve Bank (Fed) is expected to leave its Federal Funds Rate unchanged after increasing the rate at last year’s December meeting – the first interest rate hike by the Fed in almost a decade.

The recent financial market turmoil means that the Fed will only hike rates once in 2016 with money market futures only pricing in a 50 percent chance of a second hike. Federal Reserve Chair Janet Yellen is likely to maintain a dovish rhetoric by reinforcing her view that the interest rate should increase gradually.

Meanwhile, the South African Reserve Bank (SARB) is expected to increase the Repo Rate at Thursday’s Monetary Policy Committee meeting.

We at Capilis Asset Managers predict that SARB Governor Lesetja Kganyago will increase the rate by 25 to 50 basis points. The rate hike would be an effort to stabilise the rand, which has taken a beating during this year’s distinguished panic selling, and contain some of the capital outflows from skittish foreign investors seeking less risky assets. 

A rate increase sparks debate about whether the increase will be better or worse for the economy with consumers to be hit with higher loan repayments, resulting in decreased consumer spending.

Another central bank with policy making decisions on Thursday is the Bank of Japan (BOJ) which hopes to achieve 2% inflation, with plunging oil and equity prices possibly prompting further monetary policy easing. However, the BOJ’s already massive stimulus program faces dwindling ammunition as the Japanese economy battles headwinds driven by market forces beyond the central bank’s control.

In addition, to this week’s central bank policy decisions, important local data announcements, as well as data from the highly influential advanced economies are expected. These include:

  • Monday: Japan Balance of Trade and EU German Ifo Business Climate Index.
  • Wednesday: EU German GfK Consumer Confidence Climate Index and US New Home Sales.
  • Thursday: Great Britain GDP Growth Rate, South Africa PPI, EU Business & Consumer Confidence, EU German Inflation Rate and US Durable Goods Orders.
  • Friday: Japan Inflation Rate & Unemployment Rate, Great Britain Gfk Consumer Confidence, South Africa M3 Money Supply & Private Sector Credit, EU Inflation Rate Flash, South Africa Balance of Trade and US GDP Growth Rate Advance

Giacomo Bonavera is head of foreign exchange trading at Capilis Asset Managers. Click here to visit the firm’s website.

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