Macroeconomic updateSouth Africa

26 July 2022

South Africa’s July Monetary Policy Decision:Minding the US Fed’s dot plot

In brief

  • The world’s central bankers are unleashing the most aggressive tightening of monetary policy in decades to cool off surging inflation, and in the scheme of things, policy actions by the United States (US) Federal Reserve Bank (Fed) matter.
  • A more aggressive US Fed has prompted the South African Reserve Bank (SARB) to up its ante by delivering a jaw-dropping 75 basis points (bps) hike in sympathy with the US Fed, and to quell rising domestic inflation expectations.
  • Just like in most emerging markets, inflation remains a hot topic for debate in South Africa (SA) and the SARB is cognisant of these inflation risks.
  • Therefore, should inflation continue to surprise strongly on the upside the SARB will respond as it cannot afford to fall behind the tightening curve.
  • In paying attention to the risk of capital reversals from a hawkish US Fed, there is a growing risk that the SARB will continue to tail the bold moves from the US Fed.
  • And in the words of Warren Buffet – an American investor -, interest rates are to asset prices what gravity is to the apple.
  • When interest rates are low, there is a very low gravitational pull on asset prices. But when they are high, there will be a huge gravitational pull on asset values (i.e. international capital market shock)

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