United States President-elect Donald Trump’s promise to introduce heavy tariffs on imported goods and deport millions of migrant workers is likely to raise US inflation and slow the pace of US interest rate cuts, hurting the flow of capital to smaller economies like Kenya.
Standard Chartered Plc Chief Executive Officer Bill Winters said in an interview that markets have already started recalibrating their expectations of deeper US rate cutes after the election outcome, with the US 10-year Treasury bond rate going up by 14 basis points to 4.43 percent on Wednesday, its highest level since July.
Mr Trump, who is returning to the Oval Office four years after he was defeated by President Joe Biden, promised in his campaigns to impose heavy tariffs on imported goods, make tax cuts and deport millions of unauthorised immigrants.
These measures are expected to cause a jump in prices in the US, while tax cuts will force the US government to borrow more, raising bond rates.
“The view is that Mr Trump’s policies are going to be relatively inflationary, which could affect the Federal Reserve’s decision making in terms of how they adjust short term rates. I don’t think anybody has recalibrated their expectations for this week’s cut, but the recalibration for the next two years is happening in real time,” said Mr Winters.
“This means we are back to putting a bit of pressure on the economies that have struggled with higher US interest rates and a stronger dollar…unfortunately for many countries in sub-Saharan Africa including Kenya, it’s an incremental headwind.”
Higher US interest rates will typically mean a stronger dollar, with the greenback already making gains on the back of the US election results.
The rates in the US also have a significant impact on the flow of capital to emerging and frontier economies like Kenya. When the world’s largest economy raises its rates, there is capital flight from smaller markets, hurting equities markets such as the Nairobi Securities Exchange (NSE).
It also raises the cost of external borrowing by the government as lenders demand a higher premium in order to forego the safer US investments in favour of lending to Kenya.
On Thursday, the Fed cut its rate as expected by 0.25 percentage points to a range of 4.50 to 4.75 percent, but avoided giving forward guidance on whether it will be cutting the rate again in December.
The US raised its rate from near zero in March 2022 to a high of 5.25-5.5 percent (5.33 percent average) by July 2023 in response to rising inflation, which climbed to a 40-year high in the second half of 2022.
With inflation falling, it made a half percentage point cut in September, with expectations of a similar reduction by the end of the year.
For the Kenyan market, lower US rates would boost the stock market by stemming the foreign outflows that hit a cumulative Sh84.5 billion between 2020 and 2023, while also helping the shilling by making local bonds more competitive in the eyes of foreigners when compared to securities in the US.
