The US Federal Reserve gave us front row seats last week to what the new normal for global monetary policy may well look like – and it’s positive news for emerging markets. Well, those who don’t shoot themselves in the foot anyway.
Looking forward, last week’s meeting confirmed the Fed’s decision to remain patient . Its much-anticipated dot plot reflects its plans to maintain official interest rates at current low levels until economic evidence suggests otherwise. With the Fed still setting the tone for global monetary policy and other developed markets also feeling downward economic pressure, it seems the lower-for-longer interest rate environment is likely to prevail for at least the next couple of years.
For emerging markets, low developed world interest rates mean the global search for higher yields will be a feature of financial markets for the foreseeable future, underpinning investments into emerging markets. Those emerging markets that are politically stable and have healthy economies stand to benefit most from this turn in the global tide.
There’s been much debate about the risk of US following in Japan’s footsteps into secular stagnation. The risk is that with such low short-term interest rates, the US has very little leeway to reduce interest rates enough to reboot the economy. During the past three recessions, the Fed took five percentage points off interest rates during each cycle to stimulate the economy. But with the Fed Funds Rate at 2.
Big central bank balance sheets mean still elevated liquidity levels in the system looking for potential places to land. Moody’s South African rating decision this week will give investors a temperature reading to go on. Although the extensive load shedding of the past few weeks is a worry, it is unlikely to tip the balance and the rating agency is still not expected to downgrade South Africa to sub-investment grade.
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