Old Mutual shares good news about inflation and interest rates

South Africa’s low inflation environment will allow the Reserve Bank to cut interest rates twice more in 2025. 

This is despite the expected inflation shock from the US as the Trump administration implements tax cuts and tariffs – policies that are likely to be inflationary. 

Old Mutual chief economist Johann Els explained this to the media on 12 February when outlining his macroeconomic projections for 2025. 

The coming year is expected to be the best twelve months for South Africa in the past decade, with economic growth doubling to 2%. 

Els explained that this will largely be driven by a reduction in structural economic constraints, such as those imposed by Eskom and Transnet. 

The inefficiency of South Africa’s network industries has effectively been a handbrake on the country’s growth, keeping it to a 1% annual average over the past decade. 

As these sectors are opened up to the private sector, the constraints on the South African economy will be eased, leading to improved economic performance. 

Another driver of South Africa’s improved performance is cyclical factors, particularly low inflation and interest rate cuts. These ease financial pressure on households and businesses, freeing up capital to spend and invest. 

The Reserve Bank has already cut rates by a cumulative 75 basis points since September 2024, with one cut so far in 2025. 

Many economists forecast a maximum of two cuts in 2025 as Trump’s policies in the US are set to reignite global inflation. 

Crucially, these policies will also strengthen the dollar and raise the cost of importing goods into South Africa, increasing local inflation. 

Coupled with rising uncertainty and volatility in global markets, the Reserve Bank is expected to cut rates only twice in 2025. 

However, Els explained that South Africa is experiencing such low inflation that it can absorb this shock without having to put interest rate cuts on hold. 

This does not mean inflation will not rise. It will not breach the midpoint of the Reserve Bank’s 3% to 6% target range and push it to put rate cuts on hold. 

Thus, Els said there will be room for the Reserve Bank to cut rates two more times in 2025. 

This stands in stark contrast to other expert predictions, with most pencilling in only one more rate cut at the most. 

Some, such as Bank of America, expect only one rate cut for South Africa in 2025, which occurred at the end of January. 

Sub-Saharan Africa Economist for Bank of America Global Research Tatonga Rusike explained that the Reserve Bank will largely follow the US Federal Reserve. 

As the inflation picture worsens in the US and the country’s economy goes from strength to strength, the room for the Federal Reserve to cut rates has disappeared. 

Thus, Bank of America does not expect the Federal Reserve to cut rates in 2025 following Donald Trump’s ascension to the White House. 

Potential tax cuts from the Trump administration are set to boost the American economy and probably result in it overheating. 

US GDP growth has been strong for the past two years, with cash being pumped into the local economy through government spending. 

Tax cuts are set to free up close to $400 billion in additional capital for companies, further flooding the economy with cash. 

Coupled with a strong labour market and increased uncertainty, Rusike said Bank of America’s research shows that the Federal Reserve will have no room to cut rates in 2025 and may even have to increase interest rates in the US. 

This will significantly impact the Reserve Bank as it has to keep its eye on the Fed, given the outsized impact the US has on financial markets. 

If the Reserve Bank cuts more quickly than the Fed, it risks weakening the rand and reigniting local inflation as it will make US fixed-income assets more attractive on a relative basis. 

Furthermore, if the Fed does not cut interest rates, global uncertainty will spike as investors have priced in multiple reductions in US rates. 

This will, in turn, result in the Reserve Bank being more cautious in cutting rates as that will threaten to introduce further volatility into local financial markets.

Standard Bank chief economist Goolam Ballim broadly echoed Rusike’s assessment but thinks there is still room for one more 25 basis point cut in the first half of 2025.