It is a commonly accepted belief that Central Banks are in control of a country’s economy, and that one of the most powerful levers they have at their disposal to warm up or cool down the economy is interest rates. Well, this might come as a shock – but Central Banks are not in control of interest rates at all – the market is. It has done historically and will in future dictate to Central Banks what future interest rates will be. Sceptical? So was I, until I saw the facts presented graphically. Let’s start with the biggest – the United States, and the most powerful central bank – the Federal Reserve Bank. When market rates have risen, the Fed has been forced to raise rates, when they have peaked and started falling, the Fed has dropped rates, and has had to follow the market all the way down. And now let's take a look at the data for the SA market – the 3-month Treasury Bill yield against the repo rate. As can be seen, when market (T-bill) rates have risen, the Reserve Bank has been forced to raise rates, and when they have peaked and start falling, SARB has dropped rates, and has had to follow the market all the way down. The Reserve Bank has merely followed the market, habitually adjusting the repo rate in line with what the market has already done in determining the yield on the 3-month Treasury bill auction. Pretty revealing stuff, isn’t it! And a powerfully simple tool in predicting future interest rate moves – merely look at the present 3-month T-bill yield. So with the latest rate decision in July, after days of deliberation, discussion and consideration of all the factors at hand, Governor Gill Marcus announced they had decided to maintain the repo rate at 5.00% which is just what the market had been telling her to do for weeks prior. This “revelation” is fully in line with the Elliott Wave Principle – mass social mood drives markets and the economy, and that there is nothing that any government can do about it. In fact, they are almost always late (sometimes the last) in reacting to it, as we have seen time and time again. For further info go to www.ForexForecasts.co.za/ go/ZAROutlook. CAPTION James Paynter is the head market analyst at Dynamic Outcomes
