Interest rate pain for South Africa

Interest rates in South Africa are unlikely to return to their pre-pandemic levels as potentially inflationary policies from a Trump Presidency and local pricing pressures will put upward pressure on inflation. 

Upward pressure on global and local inflation, coupled with greater uncertainty and volatility in financial markets, will make the Reserve Bank more cautious in cutting interest rates in 2025. 

Old Mutual portfolio manager Jason Swartz explained that the Reserve Bank is likely to follow the lead of the US Federal Reserve in its interest rate-cutting cycle. 

Thus, the Reserve Bank will follow suit as the US Fed adopts a more cautious approach to cutting rates with Donald Trump returning to the White House. 

Swartz explained that Trump’s policies, particularly trade tariffs, are inflationary on paper and are likely to significantly impact global trade. 

For South Africa specifically, potential tariffs on the country’s trade partners could significantly impact exports and, thus, foreign currency earnings. This could weaken the rand substantially. 

However, Swartz said that as much of South Africa’s exports are commodities, it would be relatively easy for the country to find alternative buyers. 

Trump’s policies have a major impact on South Africa. They threaten to disrupt global supply chains and drive up inflation worldwide. 

Higher inflation globally will pressure central banks to maintain the tight monetary policy of the past few years and be less aggressive with interest rate cuts. 

“If we see some of these policies being implemented, it will impact how aggressive interest rate cuts are in the future,” Swartz said. 

This does not mean that interest rates will not be cut at all, but that the bottom of the cutting cycle is likely to be higher than pre-pandemic levels. 

The graph below shows Old Mutual’s forecasted interest rate levels in South Africa and some of the world’s most developed economies. 

Inflation in South Africa has steadily trended lower and in October dipped below the bottom-end of the Reserve Bank’s 3% to 6% target range.

However, this sub-3% inflation reading will likely be temporary as the impact of hefty electricity tariffs and medical aid increases still needs to be reflected. 

This is feedback from Old Mutual Wealth investment strategist Izak Odendaal, who said such a low reading would be temporary. 

The Reserve Bank’s forecast expects inflation to average 4% next year, before hovering around the 4.5% target in 2026 and 2027. The bank’s economic growth forecasts are broadly unchanged, with growth rising to 2% by 2027. 

This remains a conservative outlook compared to many private-sector forecasters. The MPC statement describes the risks to its growth outlook as “balanced”, meaning if the forecast is wrong, it can be wrong in both directions.

The Reserve Bank would be particularly concerned about the rand’s weakening versus the dollar since the US election at the beginning of November. 

To counteract this, the bank would look to ensure that the gap between interest rates in the US and in South Africa remains the same or widens to make local assets relatively more attractive. 

If this gap narrows, capital will tend to flow to the US, and the dollar will gain. 

A stronger dollar means weaker currencies elsewhere and potentially higher inflation. Therefore, central banks in those other currencies may scale back planned rate cuts to avoid excessive currency moves. 

The South African Reserve Bank, in particular, is always nervous about the possibility of a disorderly decline in the rand, which could lead to higher inflation. 

Odendaal said the current exchange rate level, around R18 per dollar, is not a concern, but the rapid decline following the US election will have raised some eyebrows. 

Due to this fear, local interest rates are unlikely to be cut significantly any time soon as the Federal Reserve’s forecasted rate cuts have greatly diminished. 

Another factor that may drive up interest rates is the sugar rush the South African economy is expected to experience from increased consumer spending from two-pot retirement withdrawals. 

The retirement reform is not expected to have an inflationary impact in 2024 under both the moderate withdrawal and the high withdrawal scenarios but will drive inflation higher in 2025 and 2026. 

Using the Reserve Bank’s core model to forecast the impact on interest rates, this uptick would result in rates being 20 basis points higher in 2025 and 40 basis points higher in 2026. 

This is under the moderate withdrawal scenario. Under the higher interest rate increases of 60 basis points in 2025 and 90 basis points in 2026 are forecasted.

However, this impact is not clear-cut as improved economic growth may support the rand, decreasing the cost of imports and driving inflation down.