15. The Macroeconomic Effects of the Expected US Monetary Policy Normalisation Shock on the South African Economy

This chapter examined what would happen to the South African economy when the US Fed is expected to normalise its policy rate as opposed to what happens to the domestic economy when the US Federal Funds Rate is raised. Evidence suggests that when policymakers consider the prevailing macroeconomic conditions, the repo rate adjustment will vary and be significantly lower compared to when the policymakers fail to pay attention to domestic conditions. Thus, prevailing macroeconomic conditions matter for the monetary policy reaction function. The expected US monetary policy normalisation shock depresses domestic economic growth, stock market activity, exports growth and liquidity growth. At the same time, the exchange rate depreciates transitorily followed by significant appreciations. This finding strengthens the argument that expectations of the US monetary policy normalisation before the actual policy rate increase have adversely affected the South African economy. Furthermore, the repo rate adjustment to US policy adjustment may not be as aggressive as this action may exacerbate the adverse effects linked to communication prior the actual Fed rate hike. The results in this chapter suggest that the bulk of the normalisation shock has been discounted. Therefore, the expectations of the Fed normalisation of policy settings are not necessarily a binding constraint on SARB policy decisions. Rather, prevailing macroeconomic conditions matter more for the South African monetary policy reaction function. In addition, large negative US policy shocks lead to bigger negative effects on the SA economy compared to small positive policy shocks. This shows that a reduction in the expected US monetary policy normalisation shock will to a large extent minimise the South African policy uncertainty.