US Fed to announce interest rates this week - here's how SA could be affected

On Tuesday the US department of labour will release the inflation figure for November. When the US inflation rate peaked in June 2022, prices were 9.1% higher than they were in June 2021. This has softened every month since, with growth in the headline consumer price index (CPI) of 7.7% for October.

"Every month that confirms this easing in price pressures makes one increasingly confident that it is high, but that the rate of inflation has in fact peaked in the US," says Hugo Pienaar, chief economist at the Bureau of Economic Research. Pienaar says that the market is looking for further confirmation of that trend tomorrow.

The US Federal Reserve (Fed) will watch the inflation figure with interest as it will be one of the key indicators for the decision they have to make the following day, says Pienaar.

According to Nicholas Kunze, macro portfolio manager at Sanlam, "US wage and core services inflation are still well above the Fed's target and will likely prove sticky."

On Wednesday the Fed will make an announcement with respect to the interest rate and provide forward guidance of what to expect in the future. It is widely expected to downscale the rate of interest increases to 50 basis points, down from four consecutive increases of 75 basis points. 

"It makes sense to moderate the pace of our rate increases as we approach the level of restraint that will be sufficient to bring inflation down. The time for moderating the pace of rate increases may come as soon as the December meeting," Fed chair Jerome Powell said in a speech on 30 November.

However, even if the Fed slow the pace at which interest rates increase, it does not mean that the level that they will peak has changed. Pienaar says that they might slow down the rate of increases, but announce that interest rates will peak at a higher level than previously thought.

This has already been priced into the market though, says Andre Botha, currency dealer at TreasuryOne. The market is already expecting a 50 basis point hike and Botha believes that the Fed will not veer off that.

The inflation figure has a greater chance of surprising the market though, think Botha. "We have seen inflation coming down in the US of late, and should the number surprise to the downside, we can expect further US dollar weakness that will help emerging market currencies like the rand," he says

South African consequences

"Sometimes it is difficult for people to comprehend how decisions made in the Eccles Building in Washington can affect us here at the tip of Africa. But, we live in a very interconnected globe and what happens in the world’s biggest economy affects us directly," says Kunze.

Pienaar agrees, saying that ordinary South Africans likely underestimate the centrality of global growth, commodity prices and global interest rates in shaping domestic conditions.

"For the most part it is actually not domestic events that drive markets – especially the rand – there are bigger global forces."

Pienaar however provides a caveat, saying that domestic news which causes huge political uncertainty, such as when it seemed President Cyril Ramaphosa would resign, naturally affect domestic markets.

So, what then for the South African impact of the potential drop in pace of American rate hikes?

"Well in theory, the higher a countries interest rate the more favourable it is for investors to park their money in that country’s banking system and to buy bonds from that country," says Pienaar.

The dollar has come under a bit of pressure in the last month says Pienaar, which is evidence of the market pricing in the potential downscale in rate increases.

"Emerging markets need a soft US dollar and countries like SA, will benefit from a weaker USD," says Kunze.

It is also worth remembering that fuel prices will decrease if the pace of rate hikes drop, as oil is priced in dollars and the rand will likely become relatively stronger to the Dollar. This is assuming that the dollar oil price remains unchanged, says Kunze. This should lead to a lower inflation environment in South Africa, he says.

There are plenty of opportunities for the Fed to deviate from expectations though, says Pienaar. On Wednesday, the Fed will announce their decision on interest rates, together with a statement with that decision, forecasts of what the Fed thinks will happen with growth and inflation (known as the summary of economic projections), and then there will also be a press conference with the Fed chairman, says Pienaar.

The Fed needs to sing from the same hymn book through all of this – otherwise there will likely be a reaction from the market.

If there are any deviations from expectations, expect significant movement on the stock market in both the USA and South Africa, says Pienaar.