Interest rate cut in South Africa on the cards

The Reserve Bank will likely cut interest rates by 25 basis points this week as inflation in South Africa remains towards the bottom end of its target range. 

However, it will be concerned about the ongoing geopolitical instability, South Africa’s tension with the United States, and the potential for the rand to weaken rapidly. 

This is feedback from Old Mutual Wealth investment strategist Izak Odendaal, who outlined the tricky position of the Reserve Bank’s Monetary Policy Committee (MPC). 

It effectively has to try to discern the impact on local inflation and the rand through the ‘noise’ of a global trade war and Trump’s public statements about South Africa. 

Odendaal said that relations between South Africa and the United States have fallen to the lowest point in years. 

Already, US President Donald Trump has slashed spending on foreign aid. This leaves South Africa with a gap of around R8 billion a year, particularly for treating tuberculosis and Aids. 

With the US imposing tariffs on friends and foes alike, duties on South African imports will likely go up at some point. 

This does not automatically translate into lower revenues for South African exporters, but some might be forced to cut prices to remain competitive in the US market.

Beyond the direct impact on US-South Africa trade is the overall health of the global economy. If global economic growth comes under pressure due to US tariffs, South African exports to China, Europe and elsewhere might also be affected. 

This could be somewhat offset by the positive impact of Beijing’s stimulus efforts and Europe’s planned increases in defence spending.

Above all, South Africa is very sensitive to shifts in global market sentiment and commodity prices. The country imports capital and exports commodities. 

It is notable that the rand has been relatively stable despite recent market jitters. This is due to a weaker dollar as markets sense a weakening US economy and potentially more rate cuts. 

However, rand stability cannot be taken for granted, complicating the picture for the Reserve Bank’s MPC when it meets on 20 March. 

Odendaal said that it is still likely to reduce the repo rate by 25 basis points despite some upward inflationary pressure from proposed VAT increases.  

Longer-term picture for interest rates in South Africa

The longer-term picture for interest rates in South Africa is far more complicated as the effect of Trump’s trade policies will become clearer in the coming months. These policies are likely to be inflationary and significantly impact global growth. 

South Africa’s economy may be particularly hard hit as China and the United States appear locked in a trade war, potentially diminishing the Asian country’s appetite for commodities. 

Despite this, the country’s inflation remains relatively low, which should provide space for the Reserve Bank to keep cutting interest rates. 

Old Mutual chief economist Johann Els explained that South Africa is experiencing such low inflation that it can absorb this shock without having to hold off on interest rate cuts. 

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.

However, this picture may change rapidly as inflation picks up from a low base in South Africa, particularly food inflation. 

Nedbank chief economist Nicky Weimar said that goods inflation has come down as far as it can and will begin to tick up off a low base. 

The same applies to food inflation, which came down dramatically in 2024. However, it has come down so far that its next move will likely be up. 

“Now, fuel prices are starting to rise, with increases implemented over the past few months. This will effectively push headline inflation higher as it is a universal input.” 

“Thankfully, services inflation is likely to remain constrained. But that low inflation rate is going to start increasing again.”

Weimar said the Reserve Bank would be watching this closely, but because it is coming from such a low level, there is still space to absorb any shock. 

And so, there is likely to be one more cut in 2025, but no more as the Reserve Bank adopts a wait-and-see approach to what goes on in the US.

The Reserve Bank’s main focus will be on the rand and whether the currency can remain stable or if it shows signs of weakening. 

If the rand weakens sharply, it will greatly increase the cost of imports into South Africa, particularly fuel, and push inflation higher.