Global markets speculate on rate rising cycle
October 6, 2009
By Ethel Hazelhurst
A year after central banks launched their synchronised rate cuts, financial markets are speculating on when the rate rising cycle will begin.
The Reserve Bank of Australia, which meets today, could be the first to hike its key rate from its current level of 3 percent, having cut ahead of its peers on October 7 last year.
The central banks of the US, the UK, the euro zone, Canada, China, Sweden, Switzerland, South Korea, Hong Kong and Taiwan followed its move.
The co-ordinated rate cuts, which continued for many months, along with emergency rescue packages by a raft of governments, eventually stabilised financial markets and paved the way for the recovery now under way.
Australia appears well-placed to reverse the rate cycle.
The Sydney Morning Herald reported yesterday that "jobs advertised in newspapers increased 4.4 percent last month, up from a 4.1 percent gain in August".
The European Central Bank and the Bank of England are expected to leave their key interest rates at near-zero levels because their economies are making only a slow recovery.
The Federal Reserve, also with a rate close to zero, is not expected to hike when the Federal Open Market Committee meets in the first week next month. Data last week showed that unemployment in the US was close to 10 percent.
In South Africa the focus is still on whether there will be a final rate decrease from the current 7 percent level when the Reserve Bank's monetary policy committee (MPC) meets in two weeks time, after a 5 percentage point cut since December.
The country lags other economies and there is pressure on the MPC to make a further cut. However, Reserve Bank deputy governor Daniel Mminele, said at the weekend that the MPC "will remain primarily focused on inflation management".
He said the bank's lead indicator was pointing to a recovery by the end of the year. And he also cited the improvement in the local purchasing managers index (PMI).
Citi, the research arm of Citibank, said the surge in the September Kagiso/BER PMI "showed significantly more convincing evidence of a turnaround in manufacturing, rising by 8.7 points in September to 48, the highest reading since May last year". A score above 50 reflects expansion and Citi said the PMI could breach that mark in coming months.
However, it said the "sustainability of the rebound will depend on global demand trends, competitiveness of local producers and an eventual recovery in local consumer demand, once the initial phase of restocking, which we suspect is largely driving the PMI recovery now, is over".
Kevin Lings, the economist at Stanlib, pointed out that the "expected business conditions" component of the PMI "has now been above 50 for five consecutive months".
Citi said "in our view (the PMI data) makes any additional interest rate cut even less likely".
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