Johannesburg - Expected plans by the US Federal Reserve to start cutting the pace of its asset-purchase programme would have “short-term challenges” for the South African economy, Gill Marcus, the Reserve Bank governor, warned yesterday.
“What nobody knows at this point in time is how much of the effects of tapering has been factored into the market,” Marcus said.
“We saw the impact of the stimulus in emerging markets, in particular in the capital flows into their markets. It created circumstances of low interest rates and low inflation. What is happening now, is the reverse.”
The Federal Open Market Committee began meeting on Tuesday to decide whether to continue with its $85 billion (R878.5bn)-a-month monetary stimulus programme that has helped to prop up global growth, supporting inflows into emerging markets.
The rand has slumped 13 percent against the dollar since May, when the Fed first indicated it might begin tapering its bond purchases.
There was about a 60 percent chance that asset purchases would be cut at the meeting, which was set to end later yesterday, Pacific Investment Management chief executive Mohamed El-Erian said.
Economic reports show US housing starts have jumped to a five-year high and Germany’s Ifo business climate index has risen for a second month.
“There is a 50/50 chance of tapering at today’s meeting,” said Jamie Searle, a fixed income strategist at Citigroup in London. “If they don’t taper today, they are likely to send a strong signal that tapering will begin in the next few months.”
A survey of 67 economists’ predicted purchases of treasuries by the US central bank would be held at $45bn a month.
Mortgage-backed security purchases would also be left unchanged, at $40bn, according to median estimates in the Bloomberg survey.
About 34 percent of economists surveyed on December 6 predicted that the Fed would start paring bond buying this month, up from 17 percent in a November 8 poll.
At 5pm yesterday the rand was bid at R10.3343 to the dollar, 2.86c firmer than at the same time on Tuesday.
Yields on benchmark South African bonds due in December 2026 were little changed at 8.22 percent.
Foreign investors bought a net R335 million worth of South African bonds and sold R520m of equities on Tuesday, according to JSE data.
Stocks around the world rose and emerging market currencies weakened ahead of the announcement by the US central bank, which was expected after 9pm last night.
The Fed has kept its benchmark interest rate at zero to 0.25 percent since 2008. Traders see an 87 percent chance that the federal funds rate target will be held steady through next year, according to futures data compiled by Bloomberg.
When it tapered, US central bank officials would offer a package of policies that might include a change in how much they paid banks on excess reserves, thresholds for changing programmes and forward guidance on policy, El-Erian said yesterday in a television interview.
“The market is going to be reacting to the package and not just one element, which is the taper,” El-Erian said. - Bloomberg