The news last Wednesday night that the US’ Federal Open Market Commission (FOMC) had increased the bank discount rate by 25 basis points, although widely expected, still had negative effects on domestic share and bond markets, as was the case at the same time last year.
On December 15 last year, the FOMC also increased rates by 25 basis points. The hawkish tone of the FOMC, however, is the worrying aspect for emerging economies in general but for this country in particular.
Although the chairperson Janet Yellen did not refer to the expected overheating of the US if President-elect Donald Trump introduced his stimulation policies, she elaborated on the fact that the FOMC expected that the US economy would continue to grow strongly in 2017 and that the current inflation rate of 1.9percent was likely to move above the FOMC target of 2 percent.
The FOMC is also worried about the current low unemployment rate of 4.6 percent, the lowest the last 40 years. If stimulation brings down this rate, even more inflation pressures will build up quickly. In this regard the FOMC foresees that the discount rate may be increased threefold in 2017.
The question remains: Will excessive interest rate hikes in the US have a profound negative effect on the rand exchange rate, share and bond markets and the inflation rate? If so, will the Monetary Policy Committee be forced to increase the repo rate and what will be the consequences on economic growth and job creation?
The hawkish tone had a negative effect on the bond market and shares last week. On Thursday alone, the all share index lost 1025 points or 2.02 percent. This contributed to the index to end the week the week 1209 points lower or 2.4 percent.
Among the sectors the industrial sector was down last Thursday by 1 211 points or 1.68 percent (2percent for the week), financials lost 717 points or 1.8 percent (2.1 percent), while the gold index tumbled 8.62 percent (3.8percent).
The rand, however, stood its ground and the currency lost only 16 cents or 1.8 percent against the dollar last week, as it ended the short week at the close of the JSE on R13.96 to the greenback.
Against the pound, the rand ended last week almost flat, losing only 2c to R17.33, and was stronger by 1c on R14.33 to the euro.