Reserve Bank warns of higher interest rates for longer

South Africa’s Reserve Bank cautioned that borrowing costs around the world are likely to remain higher for longer as doubts about the inflation outlook grow amid US President Donald Trump’s aggressive trade tariffs.

“Confidence around the medium-term outlook has reduced significantly due to heightened global trade tensions and elevated domestic uncertainties,” the central bank said in its semi-annual Monetary Policy Review published Tuesday in Johannesburg.

“Although policy rates are expected to decline further in major economies, the new risks that have emerged suggest they will remain higher for longer.”

Since Trump’s return to the White House in January, he has forged ahead with an aggressive tariff regime. On April 2 he announced reciprocal tariffs on US trading partners before postponing them for 90 days on most nations while keeping a 10% levy.

South African policymakers last month kept the key interest rate unchanged at 7.5% after three successive 25 basis point cuts because of the extreme levels of uncertainty as trade tensions escalate.

The bank reiterated in the review that policy will continue to be data-dependent and will be guided by scenario analyses, given the unusually high risks and uncertainty.

Officials noted that for the first time in several years, the risk that disinflation at a global level will stall, if not reverse, has increased sharply, causing market views of short-term rate expectations to shift higher.

While inflation in South Africa remains largely contained and is expected to stay in line with the 4.5% midpoint of the central bank’s target range, uncertainty around this outlook has risen since the beginning of the year.

The central bank said this is due to heightened geopolitical and trade tensions, as well as domestic political strain within the country’s governing coalition over plans to raise value-added taxes. 

The central bank estimates that a proposed 0.5 percentage point VAT increase on May 1, to be followed by another 0.5 percentage point increase next year, may add 0.2 percentage points to headline inflation annually.