PIcture: ISTOCK
PIcture: ISTOCK

Central banks around the world have come into focus of late given how each has responded to an improving global backdrop, weighed against idiosyncratic domestic factors. Developed markets are leaning towards monetary policy tightening, rolling back stimulus, and balance sheet reduction after years of ultra-accommodative conditions, and as deflation concerns begin to recede. In contrast, emerging markets are broadly heading in the opposite direction, more inclined to ease policy rates as their currencies recover, inflation slows and economic growth remains weak.

South Africa is a good example of the latter. The Reserve Bank's monetary policy committee cut rates by 25 basis points at its July meeting, justified by the lowering of both inflation and growth forecasts.

And there may well be more rate cuts to come as the bank does its bit to shield South Africa against even lower growth in the brief window between now and the middle of 2018, when a local currency sovereign credit downgrade may begin to stoke currency weakness and inflation worries.

Ultimately, should persistently poor economic growth precipitate a downgrade, the Reserve Bank will almost certainly be forced to reverse the cutting bias as foreign funds retreat to safer havens.

Our domestic policy path is further complicated by what is happening in developed markets, but the international economic environment remains relatively favourable for emerging markets.

This outlook is largely informed by the dilemmas that are likely to be faced by the US Fed and the European Central Bank (ECB). Low unemployment, improving economic growth and higher inflation have allowed the Fed to begin monetary policy normalisation, and Europe's central bank begins communicating a similar path to the markets.

Against this backdrop, eurozone core inflation - excluding energy and unprocessed food, and a more closely watched metric for long-term inflation prospects - has most recently jumped to 1.2% year on year in June. This was notably above market expectations.

Moreover, high-frequency data in the eurozone points towards a robust recovery in economic growth. This should help to propel even greater momentum to core inflation and give the ECB comfort in tapering its asset purchasing programme, which stands at ?60-billion (about R915-billion) a month until December.

In fact, ECB president Mario Draghi has already indicated that tapering discussions will begin in September, although we expect any such tapering to be gradual, as is the case with the Fed hiking cycle.

All the while, emerging markets are set to be given more time to get their houses in order, reduce their imbalances and capitalise on better world growth and commodity demand.

Emerging markets have been gifted such opportunities in the past and have for the most part squandered them, relying instead on healthy levels of developed market liquidity and the search for yield to plaster over home-grown dysfunction.

Given South Africa's growth trajectory, policy impasses and political inertia, all indications are that we will once again waste the opportunities provided by an advantageous global backdrop. What these favourable conditions do suggest, however, is that the domestic economic and currency fallout from the anticipated downgrade next year may be cushioned by a more forgiving policy normalisation trajectory in the US and EU.

• Matikinca is FNB senior economist

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