Bad news for the rand in 2025

Expectations for the number of United States interest rate cuts this year have lowered, which spells bad news for the rand in 2025.

Investec chief economist Annabel Bishop said the rand is likely to see a weaker outcome than previously expected this year due to a significant downgrade in market expectations for US interest rate cuts.

Markets are now only factoring in one 25 basis point cut for the US this year, down from the three cuts markets previously expected.

Bishop explained that the rand averaged R17.92/USD in the last quarter of 2024.

It started strong, averaging R17.79/USD for the fourth quarter’s first two and a half months. However, the local currency then weakened sharply in the second half of December to R18.91/USD. 

Bishop said this weakening is related to the US monetary policy meeting on 18 December, which saw a quickening in inflation forecasts for the US for 2025 to 2.5% from closer to 2.0% in its previous forecasts.

In addition, the US’s GDP growth is projected to be a bit stronger this year, at 2.1%. Therefore, this growth does not necessitate further rate cuts on its own. 

She said these factors have added to concerns over fewer US rate cuts in 2025. While this is good news for the dollar, the rand is set to take a hit.

Following this meeting, the dollar strengthened over the second half of December and has been instrumental in weakening the rand against the greenback.

The sharp change in US interest rate market expectations drove the rand substantially weaker against the dollar, to R18.87/USD from R17.70/USD.

This comes despite the rand having been less volatile against the GBP and EUR.

Bishop said the rand will likely see a weaker outcome than previously expected this year due to the large downgrading of the change in market expectations for US interest rate cuts. 

“The substantial shift in forecasts held early in December 2024 versus early in January 2025 has been a major reason for the rand weakening by more than R1/USD over the period,” she said.

“Markets will remain focused on inflation outcomes, with shifts in expectations likely to add to rand volatility against the US dollar, and incoming tariffs in the US on imported goods are anticipated to increase inflationary pressures.”

Tariffs are set to be a big theme in global markets this year, as US President-elect Donald Trump previously vowed to impose significant levies on non-US products.

In June 2024, Trump said that if he is re-elected in November, he plans to impose 10% across-the-board levies on all products imported into the US from overseas.

Bishop explained that this 10% unilateral imposition of tariff increases would not differentiate South Africa’s exports to the US from other countries, nor would a 20% or other unilateral tariff increase.

“However, tariff increases targeted at and differentiated between countries have a greater impact and would likely cause some switching in consumer preferences based on price and competitiveness,” she said.

Competitiveness is already a challenge for South Africa, with Transnet’s problems proving a significant inhibitor for the country. 

The Presidency estimates that Transnet’s incapacity to fully meet demand has reduced GDP growth by around 3% per annum.

“This is likely to remain the major limitation on GDP growth this year for South Africa, with modest inroads made on capacitating Transnet only expected to add 1% to growth, as South Africa’s GDP lifts by 1.8% in 2025,” Bishop said.

“South Africa’s GDP growth has been subdued by blockages at the ports and on the rails, and while slightly reduced versus 2024, still provides a severe brake on GDP growth, while some load-shedding is reportedly at risk of occurring in 2025 again.”

She also pointed to substantial increases in electricity tariffs that have been a significant burden on economic growth, as have increases in other costs of doing business in South Africa, while water outages have increased.

“While the US dollar has strengthened materially on the reduction in expected US interest rate cuts this year, and in anticipation of the incoming Trump government, the domestic currency is likely to remain volatile, influenced by global events,” she said.

Bishop’s expectations for the rand’s value in 2025 and onward can be seen in the table below, courtesy of Investec.