EASING MONETARY POLICY

LAST we the Central Bank of Eswatini reduced the discount rate by 25 basis points to 7.25 per cent. This was the 1st reduction in the post pandemic period. This comes as inflation across the globe moderates but still remains above the 2 per cent target in advanced economies. The interest rate adjustments had been a pivotal point to watch for markets this year. Markets had been, through out the year, gleaning at signs and signals that the central banks across the world will soon begin to cut interest rates. Following the cuts in interest rates last week, we expected to see major markets rally on that positive news.

However, markets are giving mixed reactions towards the changes in interest rates. One, therefore, cannot help but wonder if there are many fears to look out for in the economy. Furthermore, another question that begs an answer, is, are we returning to a soft money environment or rather an affordable money environment. Hence today, I will throw my hat and try make sense of the trajectory of interest rates or monetary policy.

Market pause

Data coming out of the US suggests that though the economy remains on a strong footing, the jobs figures, however, remain weak. This we saw as the non-farm pay roll showed that the US economy created less jobs than expected. In UK the figures show that weakening purchasing data especially, weakening export demand for UK manufactured goods. In China, the data is indicative of overall flagging consumer demand, coupled with weak growth prospects within the world’s second largest economy. One, cannot, therefore, discount the fact that all these macroeconomic variables have contributed to the move towards cuts in interest rates across the globe.

When the normalisation drive started, central banks in advanced economies had one goal, to control inflation and to do whatever it takes to keep inflation at bay. Hence we saw interest rate hike after hike, and even when the signs of weakening overall growth started showing the central banks held firm on the goal. However, as of last week we saw the US Federal Reserve Bank cutting its benchmark rate by 50 basis points, notwithstanding the fact that inflation was hovering over 2 per cent, though very close to the 2 per cent. This move has thrown both hope and worry into the economy. Hence markets have not entered into the bullish stance that we hoped to see with an interest rate cut.

Markets are still awaiting more economic data to give clarity on the state of the economy, we hope that as more data comes out this week, showing that the economy is in good standing only then might we see a move towards a more bullyish market. If the fundamentals hold, not a ‘too little too late’ scenario in interest rate cuts emerges, then we expect gold to begin giving up some of its gains, brent crude futures to climb to the higher USU$70’s and the consumer market will push growth in the short to medium term, through demand.  

Trajectory

We should expect that if inflation retains its current downward trend globally, then we shall see further rate cuts. I would expect that if this trend holds, rates should move towards pre-pandemic levels at least by March of 2025. Note that, this will hold only of the global inflation keeps true. We are also on the watch for global supply chains and geo-political tensions that might affect the inflation cooling period. Geo-political tensions between the West and Russia continue to simmer as Ukraine continues an offensive on Russia, utilising weapons supplied by the West.

We wait to see if Ukraine will be granted permission to use long range artillery to hit targets further inland in Russia. Russia, already views the West as interfering in its war effort and indirectly fighting on behalf of Ukraine. How, Russia will interpret utilisation of long range artillery may turn the war into broader crisis. This is a development that is protracted in its manifestations, however, remains a volatile tectonic space in the geopolitical watch list. Also, tensions in the Middle East have spilled into Lebanon, the region remains very volatile, if Israel’s de-escalation through escalation does not end soon, then the entire region remains volatile.

Domestic effects

In the domestic front, we expect the economy to grow in the current quarter, as this easing in monetary policy will accommodate growth and fiscal expansions. Credit extended to the private sector is projected to increase, supporting an expansion in credit supported demand. Demand is expected to rally, however, since prices still remain high even in the face of cooling inflation, the growth in demand may not be much. Consumers are likely to restore their previous consumption patterns. Consumer demand will likely not fall into a new bundle space. Adjustments into new bundle spaces may be expected earlier into 2025, as interest rates shift back to pre-pandemic levels. Consumers will prime linked debt instruments are expected to gain this marginal increase in disposable income. Companies are also expected to push credit link expansions as the interest rates continue to fall. Growth is expected to stay positive this quarter.

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