The Central banks dilemma

January 2024

We started 2023 with the hope that global interest rates might peak and stabilise on the back of contained and downward trending inflation. This was roughly in line and the higher rate environment seems to have had the desired effect on bringing inflation down for now. The downside is however that the higher rate environment has already strained some economic sectors. Central banks, especially the Federal Reserve Bank, will have to decide soon on when to start bringing rates down again. The risk of doing it to early and inflation turning higher again, will make them cautious to cut too early. But, if they wait too long to cut, further economic slowdown and recession is a risk. Market sentiment will be driven by the when question and it is our expectation that volatility will be high and rapid based on this reality in 2024.

Update: May 2024

The Federal Reserve bank has decided to keep rates unchanged again. This came on the back of inflation data showing a slight increase in the USA as well as in South Africa and other parts of the globe. We therefore do not expect the South African Reserve Bank to cut rates at the next meeting before the general elections.

Potential regime changes?

January 2024

On the global political front voters from more than 70 countries (including South Africa) will cast a vote of some sort in 2024. This is significant! The outcome of the elections earlier in the year could potentially have an impact on the elections at the tail end of 2024 (US and UK amongst others). It is also very possible that regime changes will take place which could steer economic policies and relationships between countries in different directions as it currently is.

In the light of 2024 being an election year, it is reasonable to expect governments to spend on that which they hope will keep them in power. Examples could be more grants and social support initiatives. Although Central banks are supposed to function independently, a decision to lower interest rates sooner will be popular amongst voters and fit the scripts of the pre-elections political power game very well.