Bad news about interest rates in South Africa

Standard Bank forecasts only one more interest rate cut for South Africa in the current cutting cycle, with the Reserve Bank likely to adopt a wait-and-see approach regarding US trade policy. 

The bank revealed this as part of its macroeconomic forecasts in its annual results presentation for the year ended 31 December 2024. 

Africa’s largest bank by assets grew its headline earnings by 4% to R45 billion and maintained a return on equity of 18.5%. 

This was driven by modest growth in net interest income across its businesses of 3.2% to R101.25 billion as credit impairment charges declined.

The bank explained that financial pressure on consumers is decreasing, particularly in South Africa, as interest rates decrease. 

In its current rate-cutting cycle from September 2024, the Reserve Bank has cut rates by a cumulative 75 basis points. 

Standard Bank anticipates one more 25 basis point cut in the first half of 2025 to complete the cutting cycle. 

This is despite inflation hovering around 3% in South Africa, with the bank expecting prices to rise throughout 2025. 

In South Africa, the bank expects inflation to remain well-contained due to the lack of strong demand growth and low wage growth. 

However, it will rise from around 3% to the midpoint of the Reserve Bank’s target range and hit 4.5% in the year’s second half. 

As inflation will rise from a low base, Standard Bank expects the Reserve Bank to cut rates once more by 25 basis points as it intends to reduce the repo rate to a neutral level. 

It did warn that there may be a pause along the way to this neutral level, with the Reserve Bank waiting to see the effects of US President Trump’s trade policy.

United States’ impact on interest rates 

The Reserve Bank will closely monitor what happens in the United States due to its outsized influence on global financial markets and the possibility of a weakening rand reigniting inflation. 

As the US inflation picture worsens and the country’s economy grows, the Federal Reserve’s room to cut rates has disappeared.

This will significantly impact the Reserve Bank, which 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.

Nedbank economist Nicky Weimar warned of such an eventuality as she explained that Trump’s policies will be inflationary and boost the dollar in the short term. 

If inflation rises in the US due to tariffs and stricter immigration policies, it will have a ripple effect on global inflation. 

In particular, if other countries retaliate against the United States’s tariffs, a global trade war will significantly disrupt global supply chains and push prices higher. 

However, given the low inflation in South Africa, the Reserve Bank is unlikely to have to hike rates at all in 2025 and will most likely cut them once more. 

This may have the unintended consequence of weakening the rand versus the dollar as the interest rate differential between the two countries will narrow. 

A narrower interest rate differential will make US-based assets much more attractive to investors on a risk-adjusted basis. 

As a result, capital is expected to flow into the US and out of emerging markets, strengthening the dollar and weakening emerging market currencies, such as the rand. 

In turn, this will make it more expensive for South Africa to import goods, raising prices and inflation. 

Weimar said this is what the Reserve Bank would be most concerned about, as it intensely focuses on the stability of the currency.