South Africa’s big interest rate problem

Like many other global central banks, the South African Reserve Bank (SARB) is facing uncertainty in 2025 and is unlikely to announce any more rate cuts until markets have settled.

On Thursday (20 March), the Reserve Bank’s Monetary Policy Committee voted 4-2 to hold interest rates at their current levels, keeping South Africa’s interest rates in fairly restrictive territory.

While the central bank has removed “restrictive” or “accommodating” from its descriptions of current policy, Old Mutual Wealth Investment Strategist Izak Odendaal said rates are higher than the SARB’s ‘neutral’ positioning.

Odendaal noted that forward-looking real interest rates—factoring in the SARB’s inflation forecast—are sitting at 3.9%, a much higher position than the estimated neutral rate of 2.5%.

This means that South Africa’s interest rates are still “restrictive”, despite the much improved and often better-than-expected headline inflation rate.

Various analysts, mostly from the property sector, have used this as evidence that there is room for a much bigger interest rate cut in South Africa.

The SARB’s own modelling suggests there is room for at least one more 25-basis-point cut. However, Odendaal said this is unlikely to materialise any time soon.

“It is all about the global environment—or so it seems,” he said. “The inflation outlook has improved, but the uncertainty around that outlook has widened.”

The analyst pointed to the United States Fed and even the Bank of England, which have also held rates in recent meetings.

Like these central banks, the SARB’s MPC members do not know exactly what lies ahead in global markets and are following a cautious approach to policy.

Central banks are being extremely careful about what has become known as the ‘Trump tariffs’—US President Donald Trump’s constant threats and promises to raise tariffs on close trading partners.

These have the potential to greatly impact global trade and inflation, even possibly leading to rate hikes if it erupts into an all-out retaliatory trade war.

The big problem, Odendaal said, is that no one really knows what exactly will actually be implemented as yet.

“President Trump has a habit of announcing and then postponing tariff increases, and it is unclear what is a threat meant to extract concessions and what is likely to stay,” he said.

Whether all or some of the tariffs get implemented is anyone’s guess, and while businesses can be highly adaptable, they still need to know what they’re adapting to. This also carries costs, Odendaal noted.

“The default position for many will be to hold back on making any big decisions.”

Feeding through to rate decisions, the US Fed has taken these risks into account and is keeping things on hold for now. For South Africa, it is much the same—but with added incentive to not move ahead of the Fed.

Put simply, if the gap between South African and US interest rates is too small, money will leave South African shores and flow to the United States, Odendaal said.

“This could lead to a disorderly depreciation of the rand, higher inflation, and unmoored inflation expectations.”

“The more anxious investors are, the higher the interest rate required for the risk of investing in an emerging market like South Africa.”

“This is the main reason why the Reserve Bank’s estimate of the neutral real rate is so high to begin with,” he said.

This means that South Africa has no real choice but to lie and wait for whatever is coming down the road.

Odendaal said that if things settle down internationally, there may be room for another rate cut.