Investors in South Africa have remained concerned about the growing geopolitical tensions in the Middle East and potential impact on inflation and that it could delay interest rate cuts across major economies.
This comes as the recent attacks on the Red Sea have brought immediate and substantial strains on global supply chains as ships can no longer go through these waters, forcing them to reroute.
Goods such as back-to-school supplies, which need to be shipped now, are going to see major delays, limiting the availability of these goods and furthering the volatility that has been experienced in consumer inflation.
The Houthis have launched at least 26 drone attacks on vessels passing through the Red Sea en route to the Suez Canal and key global economies since November 19 in protest at Israel’s war on Gaza.
Asset management firm Schroders yesterday said that satellite images showed that virtually no ships destined for major European ports or the US and UK were currently passing through the Red Sea, instead diverting around southern Africa.
Schroders senior emerging markets economist David Rees said it seemed that global supply chains were facing a perfect storm of risks when adding problems at the Panama canal, challenges with the key shipping route for German manufacturers, and the risk of a repeat of Chinese military drills due to the upcoming elections in Taiwan.
Rees said all of this evoked painful memories of the supply chain problems that erupted during the Covid-19 pandemic, as these contributed to the recent bout of high inflation that ultimately forced global central banks to aggressively raise interest rates.
He said that markets were now pricing in aggressive interest rate cuts in Europe, the UK and US, with some cuts anticipated as early as the first half of 2024.
“Much will depend on how long the current disruptions last, but at least three important differences in the global economic backdrop suggest that problems in the Red Sea are unlikely to lead to major increase in inflation,” Rees said.
“First, demand conditions are now much softer. Second, whereas lockdowns to contain the spread of Covid-19 meant that demand was concentrated into the goods sector during the pandemic, consumption patterns are now much more balanced. Third, the supply side of the global economy is also in much better shape.
“A more immediate risk to global inflation would be if tensions in the Middle East begin to affect the supply of commodities, in particular driving up energy prices.”
The South African Reserve Bank (SARB) will be monitoring all these developments closely as its Monetary Policy Committee (MPC) will decide on its interest rate stance at the first meeting for the year later this month, a few days before the US’s Federal Open Market Committee (FOMC) meeting.
The FOMC minutes released last week for the December 13, 2023 meeting proved more cautious on the start of the US rate cut cycle than markets were hoping for.
The SARB has held interest rates unchanged at 8.25% per annum since May 2023 as it aims to anchor inflation expectations more firmly around the 4.5% midpoint of the 3-6% target band and to increase confidence of attaining the inflation target sustainably over time.
Investec chief economist Annabel Bishop said that the SARB was likely to keep rates on hold again.
Bishop said both the MPC and the FOMC were expected to leave interest rates unchanged, with the FOMC minutes proving more cautious on the start of the US rate cut cycle than markets were hoping for.
“Financial markets have pulled back on expectations of the timing of the first US interest rate cut, from early last week’s view of close to a 75% chance of a 25 basis points cut in the fed funds rate at the 20 March FOMC meeting, to now around 50%,” Bishop said.
“The start of the US rate cut cycle is typically positive for investor appetite towards emerging markets portfolio assets, bolstering emerging markets currencies, but investor sentiment towards SA has been negatively affected by domestic issues.”