Interest rates are now predicted to rise to 0.9 percent next year, up from the 0.3 percent expectation from September.
Rising US interest rates are often thought to be bad news for these economies as they increase debt burdens, trigger capital outflows, and generally cause a tightening of financial conditions.
The final (and most anticipated) Federal Reserve meeting this year took place last week.
In summary, starting in January 2022, the Fed will cut its monthly purchases of treasury securities and monthly mortgage-backed securities buys too.
Consequently, interest rates are now predicted to rise to 0.9 percent next year, up from the 0.3 percent expectation from September.
To market watchers, this suggests there will be at least three rate hikes next year. You may wonder what’s this got to do with the price of bread in Nakuru? Well, you know when they say “when the US sneezes, the world catches a cold” is probably true.
“Spillovers’’ of US monetary policy are a big deal, particularly for emerging markets. They tend to be disruptive.
Rising US interest rates are often thought to be bad news for these economies as they increase debt burdens, trigger capital outflows, and generally cause a tightening of financial conditions that can lead to financial crises.The opposite is true.
To give the background story — for some time now, the US Fed has been fretting about rising inflation. But the Fed Chair, Jerome Powell, wasn’t always concerned about inflation.
In fact, at some point he had even called it “transitory,” but that didn’t pan out. With inflation now above target, the Fed has mulled unwinding its pandemic-era easy monetary policy.
In effect, by tapping the brakes on the economy, it hopefully gets to rein in rising inflation. The bad news is the harder it hits the brakes, the greater the risk of an accident that freaks out financial markets and of course, hurts emerging markets — or both.
Compounding the matters further is the rising Covid cases, high oil prices and the supply chain crisis. Do all rate rises mean doom and gloom for emerging markets? Not at all.
A recent Fed note on the subject ‘Are Rising US Interest Rates Destabilising for Emerging Market Economies?’, shows that the effect of rising interest rates is seen having two unique outcomes.
On one hand, if the rates rise, driven by favourable growth prospects, then the effect is likely to have relatively benign effects on emerging financial markets.
This is because the benefits of higher US gross domestic product through increased import demand from its trading partners and increased investor confidence should mute the costs of higher rates.
Conversely, if higher rates are driven mainly by worries about inflation or a hawkish turn in Fed policy, then this is seen as likely to be negative for emerging markets. Unfortunately, the latter is our present reality.
The question is — what is the likely impact on our financial markets? The answer is that the effect is already being felt. The shilling is trading at its lowest against the dollar. On a year-to-date basis, it depreciated by 3.4 percent against the dollar — in 2020, it dipped by as much as 7.7 percent.
The share market has flat-lined this year (expected to dip in the coming months as the local unit loses ground) while the several Eurobond yields have gapped up between 50-110 basis points — poised to rise even higher by end of the year. In short, better prepare for a bumpy road ahead.
Mwanyasi is the managing director at Canaan Capital
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