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Johannesburg – Potential rate hikes by the Federal Reserve Bank (Fed) this year may not have a big impact on emerging markets and the local currency, according to Sanisha Packirisamy, economist at Momentum Investments (MMI).
In a report on the economic outlook for 2017 released on Thursday, Packirisamy highlighted that the Fed is expected to increase interest rates three times this year. However, MMI expects fewer hikes. Projections indicate the Fed may also introduce three hikes in both 2018 and 2019.
READ: Fed forecasts 3 more hikes in 2017
“To the extent to which it [rate hikes] is priced in, it won’t have a big impact on emerging market currencies. They normally do take a knock on the day, but generally recover,” Packirisamy told Fin24. “If the hike is faster than anticipated, emerging market currencies and the rand will take a knock.”
Following the Fed’s 25 basis-point rate hike in December 2016, the rand fell by 2% to R14 to the dollar, but later strengthened to about R13.60/$ because the market had priced in the increase, explained Packirisamy.
READ: Rand falls as US Fed raises rate
If the rate hikes occur faster than anticipated by markets, it may feed through to inflation expectations and have an impact on the South African Reserve Bank’s rate cycle, explained Packirisamy.
In the monetary policy committee’s (MPC's) previous statement on November 24 2016, Reserve Bank governor Lesetja Kganyago said the MPC does not follow US policy "pound for pound, basis point for basis point".
“We need to be guided by whether the rate hike is fully priced in the current financial market,” he added. If the effects are not fully priced in, the reaction would be to raise rates, he explained.
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The potential rate hikes by the Fed depend on movements by the Trump presidency, especially in terms of whether fiscal policies go through, explained Packirisamy.
“If plans to increase infrastructure spend that boost GDP [succeed], then the Fed would introduce rate hikes if the growth outlook is better and if there is higher inflation,” she said. But this all depends on the push back by hawkish Congress members on infrastructure spend.
“The Fed is likely, in our opinion, to err on the side of caution initially while navigating an uncertain political transition.”
