Economic impact of US Fed tapering likely to be limited

Financial markets in Africa have taken a hit over the past month following signals from the US Fed that it intends to taper its asset purchases under QE3. Nevertheless, we think that the economic impact of the Fed’s tapering – and eventual tightening of monetary policy in the US – will be fairly limited. Although the external financing environment is likely to become more challenging over the coming years, the majority of the region’s current account deficits are being funded by relatively stable, long-term inflows of foreign direct investment. What’s more, policy tightening in the US is unlikely for some time – we do not expect the fed funds rate to be increased until 2015. While policy tightening in the US will ultimately lead to higher interest rates in Africa, this is likely to be a slow process, meaning that monetary policy should remain accommodative for some time to come.