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Commentary for 10 May 2004 International The US April employment release showed an increase in employment that no one expected. Employment growth (see graph) is now much stronger than was generally expected and this can lead to the Federal Open Market Committee (FOMC) raising the fedfunds rate perhaps as early as the June 29/30 meeting. The statement after the May 4 meeting of the FOMC said that the accommodating monetary policy of the last couple of years has come to an end and that rates can gradually move upwards. The appreciation of the euro in the beginning of the week came to an end after the release of the employment report and the dollar had one of its largest daily gains since 1999. Some of the major banks in the light of the employment report are changing their views on the dollar and now sees a stronger dollar at the end of the year instead of a weaker dollar. The Bank of England raised its repo rate by 25 basis points to 4.25%, whilst the European Central Bank (ECB) kept their interest rates unchanged.
Local The rand is trading above the level of 7 rand per dollar after the release of the US employment figures. The movement of the rand in the last week is for a large part a mirror of the movement of the dollar. In spite of recent very good local inflation figures the increase in oil prices (see graph) to its highest levels since the 1990 Gulf War together with a weaker rand can rekindle inflationary expectations. Increases in oil prices and a stronger dollar as is the case now sometimes goes hand in hand because a higher oil price also increases the demand for dollars. The Monetary Policy Committee (MPC) may yet decide that if oil prices do not decline that a timely increase in rates may be needed to keep inflationary expectations in check. The latest release on money supply and credit extended shows that growth in demand is moderating and had this been the only consideration that rates could have remained unchanged. The MPC may however hike rates to quell expectations.
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