FED rate cut: Rise and adapt (Part 2)

“INTEREST rate cuts reduce the cost of borrowing in US dollars, creating more favourable liquidity conditions for businesses globally,” said Richard Carter of Quilter Cheviot in an email to CNBC Africa.

He pointed out that recent global stock market volatility has largely been driven by speculation around the US Federal Reserve’s rate cuts.

The US Federal Reserve’s recent 50 basis point cut has reshaped the global monetary landscape with wide-reaching effects and as Tanzania’s Monetary Policy Committee (MPC) prepares for its October 2nd meeting, following our earlier exploration of the country’s challenges with capital inflows, currency fluctuations and inflation in part 1 of the series, this article examines how global trends and the Fed’s rate cut might impact Tanzania’s economy.

Global Economic Shifts the Bank of England has clarified that it does not intend for investors to expect an aggressive easing cycle following its initial rate cut in August, making a September reduction unlikely.

However, expectations for further cuts in November are growing, with projections suggesting rates could drop to 3.25 per cent by next summer.

Meanwhile, the Bank of Japan (BoJ) held its key short-term interest rate at 0.25 per cent in September, the highest since 2008, signalling no urgency to raise rates further after two hikes earlier this year.

Japan’s economy is set for moderate recovery despite stagnant exports and industrial production, with year-on-year inflation hovering between 2.5 per cent and 3.0 per cent, driven by rising service prices.

The People’s Bank of China (PBoC) maintained its key lending rates, keeping the one-year loan prime rate (LPR) at 3.35 per cent and the five-year rate at 3.85 per cent, after unexpected rate cuts in July.

This steady stance comes even as the US Federal Reserve begins its rate-cutting cycle, with China relying on short-term rates to guide markets amid economic uncertainty following delays in its medium-term lending facility operation.

The Reserve Bank of India kept its benchmark repo rate unchanged at 6.5 per cent for the ninth consecutive meeting in August 2024 to support growth and maintain inflation near its 4.0 per cent target.

Conversely, the Bank of Russia raised its key interest rate by 100 basis points to 19 per cent in September to combat rising inflation, which is expected to exceed the 2024 forecast of 6.5-7.0 per cent.

Despite slower economic growth due to supply constraints and weaker external demand, strong consumer activity, a tight labour market and increasing inflation risks driven by foreign trade challenges continue to shape Russia’s economic outlook.

Sub-Saharan Economic Shifts on September 19, 2024, South Africa’s Reserve Bank (SARB), the largest central bank by nominal GDP in Sub-Saharan Africa, cut its key interest rate by 25 basis points to 8 per cent, marking its first-rate reduction since the pandemic.

This move followed a decline in inflation to 4.4 per cent in August.

The Central Bank of Egypt, the second largest by nominal GDP in Sub-Saharan Africa, kept its interest rate unchanged at 27.25 per cent for the third consecutive meeting, as headline inflation eased to 25.7 per cent in July.

In contrast, on September 24, the Central Bank of Nigeria, the region’s fourth-largest economy, raised its benchmark interest rate by 50 basis points to 27.25 per cent, marking its fifth consecutive hike in 2024 aimed at combating inflation and stabilising the naira.

Meanwhile, the National Bank of Morocco, the region’s sixth-largest economy, held its benchmark rate steady at 2.75 per cent in September, following a June rate cut, citing moderated inflation and projecting headline inflation to fall to 1.3 per cent in 2024.

On the other hand, the Central Bank of Kenya, the seventh-largest economy, reduced its benchmark rate to 12.75 per cent on August 6, 2024, after keeping it at its highest level since 2012, driven by an improved global outlook and easing inflationary pressures.

Angola’s central bank held its key rate at 19.5 per cent as inflation dropped to 30.53 per cent in August, with expectations of further decline.

Similarly, Rwanda responded to stable inflation projections of around 5.0 per cent by cutting its key rate twice in 2024, from 7.0 per cent in May to 6.5 per cent in August.

Ghana followed suit, reducing its rate by 200 basis points to 27 per cent in September after inflation eased to 20.4 per cent, though still above its target.

Meanwhile, Uganda also adjusted its policy, lowering its rate by 25 basis points to 10 per cent in August, despite inflation rising slightly to 4.0 per cent, yet remaining below its 5.0 per cent target.

MPC Meeting as Tanzania’s Monetary Policy Committee (MPC) approaches its 233rd meeting, the most likely outcome, with a 50 per cent probability, is a small interest rate cut of 5 to 30 basis points.

With inflation remaining stable at 3.1 per cent (August 2024) and private sector credit increasing to 35.355tri/- (July 2024), a modest cut appears viable.

This would align with global trends, including rate cuts by the US Federal Reserve and easing measures in South Africa and Kenya, aimed at stimulating investment while minimising inflation risks.

Alternatively, there is a 40 per cent chance the MPC will keep rates steady at 6 per cent, prioritising economic stability in response to the 1,557 million US dollars trade deficit in March 2024 and rising import costs, following similar approaches by Angola, Morocco and Egypt.

This move would aim to stabilise the Tanzanian shilling and manage inflation, which stood at 3.1 per cent in August 2024.

However, while holding rates would be the initial step, further actions may be needed if economic conditions deteriorate, such as considering quantitative easing to expand the money supply, which reached 46.931tri/- in July 2024, or intervening in currency markets to defend the shilling, particularly given the external debt of 29.685 billion US dollars in the same period.

ALSO READ: FED rate cut: The resounding effects (Part 1)

A moderate tightening of the Central Bank Rate (CBR), similar to Nigeria’s approach aimed at curbing inflationary pressures like food inflation, which stood at 2.8 per cent in August 2024, is highly unlikely, with only a 10 per cent probability, making it an unreasonable expectation.

As we await the BoT’s decision, the final part of this series on October 8th will assess the MPC’s 233rd meeting resolutions and how they could shape Tanzania’s financial landscape in the next quarter.

Stay tuned!