Interest rate warning for South Africa
Donald Trump’s victory in the 2024 election could lead to long-term pressure on interest rates in the United States, which would have a ripple effect on global rates, including in South Africa.
According to economists, this means that interest rates could trend higher in the long run and a slower cutting cycle in the short- to medium-term.
The US Federal Reserve is expected to make its penultimate rate announcement on Thursday, with economists and analysts saying that the latest election outcome is unlikely to impact the FOMC’s decision.
Following a 50 basis point cut in September, markets are expecting a smaller 25 basis point cut on Thursday and another 25 basis point cut in December.
According to George Brown, Senior US Economist at Schroders, looking at the longer-term, inflation will likely prove stickier under the Trump administration, reinforcing the conviction that the US Fed will not deliver as much easing as it has previously indicated it will.
“Given our view that the neutral rate lies around 3.50%, Trump’s return to the White House likely means that the Fed needs to keep rates above this level,” he said.
This was echoed by other economists and analysts at the group, who see a “higher for longer” view coming back into the narrative as markets map out future uncertainties.
Locally, the South African Reserve Bank (SARB) Monetary Policy Committee (MPC) is expected to deliver its final rate decision of 2024 later this month, where a small 25 basis point cut is expected.
The SARB doesn’t exclusively track the Fed in its rate decisions, but as a dominant market, the US does lead on many of these moves.
While a Trump presidency is unlikely to push the central banks off a rate-cutting path in the near term, there are worries that the 47th administration of the USA will have longer-term knock-on effects in global markets, which might work against this.
Specifically, economists have raised concerns that Trump’s position on trade with China and his US protectionist policies will lead to a domino effect on global markets, where higher tariffs and tighter trade conditions could dampen growth and, in turn, the commodities market.
Citadel Global Director Bianca Botes warned that the Trump presidency will likely spur risk aversion in the market, which is bad for emerging economies and currencies like South Africa and the rand.
This will be particularly hard-felt in the energy sector and commodities market, where South Africa, as an importer of fuel, would face higher costs, weakening trade balance and impacting South Africans directly through higher fuel and production costs.
This would have a significant impact on the inflation and interest rates, when looking at things in the longer-term.
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