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The SA Daily 16 February 2018

If the Fed hikes faster than expected

  • Today, we explain the transmission mechanism of the US’s proposed additional fiscal stimulus, and we highlight a potential risk to SA should the Fed be forced to hike faster than planned – because fiscal stimulus increases the demand-pull pressures in the economy.
  • SA could benefit from an increase in fiscal stimulus in the US via the broader impact that the US economy has on world growth translating into higher demand for commodities.
  • A potential risk (if the Fed hikes faster than expected) is if inflation expectations decrease, thereby increasing US real rates as US nominal yields rise. This could potentially lead to force selling of EM and SA assets by foreigners as they seek to take advantage of a declining spread between US and local real interest rates.
  • We see South Africa as well placed though to withstand foreign selling of bonds, as long as the trend in SA inflation is lower in 2018 and South Africa’s real interest rate rises steadily, and/or offsets any increase in US real interest rates.

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