You're listening to Strictly Business Podcast with Lindsay Williams.
The World Central Banks have been very active in the last part of January 2025.
We've had the Bank of Japan, they raised rates, but we're not going to talk about
them.
We're going to talk about a couple of others.
We had the ECB and they cut rates by 25 basis points.
But what I want to focus on is the U.S.
Federal Reserve's Federal Open Market Committee and also the South African
Reserve Bank's monetary...
policy committee.
They both had meetings and with me to review this monetary policy activity is
Ruan Naidoo,
who's a portfolio manager at 91 in Cape Town.
It's been an interesting year, Ruan.
Welcome, by the way.
And there's been a sort of a shift.
A year ago, everyone said, thank goodness inflation is coming down and thank
goodness we're going to get cuts across the board.
The emphasis has shifted slightly, don't you think?
Hi, Lindsay.
Thank you very much for that introduction.
Yes, certainly there has been a shift in the emphasis from the FOMC.
And I think this shift really took place in the December meeting last year where
Fed Chair Jerome Powell made the statement that we were entering a new phase of
monetary policy.
And after the January FOMC meeting,
it's become clearer that this new phase could probably best be characterized as.
wait and see mode.
The Fed is clearly in no hurry to move interest rates after having cut 100 points
last year.
And our view is that going into the March FOMC meeting, we're likely to see them
remain on hold.
Yes, the market seems to be saying that there's a possibility of a cut in June,
whereas before we were talking about three, maybe even four cuts in 2025.
That was the feeling last year.
Is it because of...
the so-called stickiness of inflation or are there other factors as well
the the fed chair jerome paul has characterized inflation um very positively
uh he seems to
be very dovish in his view on where inflation is heading and he seems
confident that it's going to reach
the target but there are risks to that outlook and those risks stem specifically
from
u.s policy They mention tax policy, immigration policy,
they mention tariff policy, as well as regulation.
And it's the difficulty to distill this into an inflation and growth outlook that
is keeping them cautious,
in my opinion.
It's very interesting because what he's doing is almost second guessing the new
president, the 47th president of the United States of America.
You know who?
Donald J.
Trump.
So he's saying, well, if the tariffs come into force and, for example.
They are threatening, as we pre-record this on the Friday.
On the Saturday, they're saying there's going to be 25% increases on goods coming
from Canada and
Mexico.
So Jerome Powell's saying we can't do anything until we know what the story is.
And the other thing in this rather long question for you, Ruan, is that Donald J.
Trump was furious with the fact that interest rates did not come down.
And he posted something quite nasty.
on his Truth Social media platform.
A little bit dangerous, I think.
Yes, it is definitely a worrying development in terms of
Fed independence and central banking independence in general.
I was pleased by the response that Jerome Powell gave in his comments at the press
conference,
basically trying not to comment very much with regard to...
Donald Trump's policy or the new administration's policies.
How this really impacts inflation expectations is the main point of
consideration.
And at this point, we're starting to see some of these inflation expectations begin
to take up.
So if you have a president calling for artificially low interest rates,
we've seen what that has done in many developing economies around the world.
It is not a good space for central banks.
No, it's not.
One of the great things about South Africa, Ruan, is that the South African
Reserve Bank has always, in my opinion,
behaved responsibly, independent and at times rather conservative.
But I think it served the country well.
What did the South African Reserve Bank say after their decision to cut rates by
25 basis points?
Yes, agreed.
Certainly the South African Central Bank, the SARP, has tremendous credibility in
the marketplace.
Yes.
And that institutional strength is one of the key features that keeps South African
ratings higher than otherwise.
The South African Reserve Bank...
did decide to cut interest rates by further 25 basis points yesterday.
However, this was done in a split vote.
Two members of the committee prefer to have held interest rates steady at this
meeting,
which potentially means that we are now going to be in a pause or on hold period
for a period of
time, while we also wait for our reserve bank to get a better grip on
on the outlook from the United States.
Yes, how does the RAND factor come into play here as well?
The RAND has been, and it was threatening to go to all-time lows fairly recently
against the US dollar.
It's steadied a bit now,
but if the US dollar starts to rally because of the Jerome Powell stance on not
cutting rates as many times as many people thought, and the dollar strengthens even
more,
and the RAND weakens even more, do you think...
that is in the back of Liceche Cognago's mind?
Oh, certainly.
In fact, the central bank had actually indicated a scenario in which we would see
a 10
percentage point
tariff on all imports into the US and some sort of retaliatory measures by other
countries.
And under that scenario, our monetary policy committee projects that the RAND
could depreciate to nearly
21 RAND to the With that kind of a depreciation,
the estimates is that inflation locally will reach 5%.
And perhaps somewhat comfortingly,
the policy rate would only trend higher by half a percentage point on the back of
that type of scenario.
So that's the precise sort of estimates that the Reserve Bank has provided us with
regards to the tariff war.
Okay, so in summary, we've had the Bank of Japan raising rates.
Very, very slightly, but still a raise it was.
The ECB cutting rates, the South African Reserve Bank cutting rates,
and the US Federal Reserve leaving rates on hold.
What does that mean for you, for income investors?
What does it mean for your strategy at 91?
This kind of environment with evolving interest rates, macro volatility,
really does suit active strategies.
For example, diversified income fund, which is seeking to both participate in
rallies in bond markets,
markets, which we are likely to get in the event that inflation is lower and we do
not see
the kind of tariff impacts some are predicting.
But also on the other side, the Diversified Income Fund is seeking to
protect capital in difficult environments
of risk of the kind of potential environments we would see if tariffs are
implemented and some of the
more onerous policies of the United States comes through.
Okay, but no massive changes given what we've seen at the end of January, but just
maybe a tweak here and there?
Yes, we had participated in the rally in interest rates during the course of last
year.
So we have reduced our interest rate exposure on the funds slightly.
We have increased some of exposure to dollar assets on the back of the potential
for the dollar
to strengthen.
And I should.
we see tariff announcements come through.
In our property building block, we spent much of last year, the latter part of last
year,
overweight in South African property names, given some of the risk premia that
was going to be expected to come out of
prices.
And we have subsequently switched some of that exposure into offshore names
going into this year.
Interesting times, Ruan.
Thank you very much for your analysis.
That was Ruan Naidoo.
portfolio manager and 91 in Cape Town.
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