What Trump means for interest rates in South Africa

Donald Trump’s victory in the US election could force the South African Reserve Bank to act cautiously when it comes to interest rates.

Trump won the US election in a landslide, winning all seven battleground swing states, the electoral college and the popular vote.

Trump’s economic priorities focus on putting “America First.”

Regarding interest rates, Old Mutual Wealth Investment Strategist Izak Odendaal said that if the US Federal Reserve fears inflation will deteriorate due to tariffs pushing up prices and immigration restrictions lifting wages, it could be more cautious in cutting interest rates.

That said, as with the likely tax cuts, the economic impact could take some time to materialise.

Thus, the Fed will likely stay on the path of reducing rates.

“For now, therefore, the Fed is still on a path to reducing rates. Market expectations for future rate cuts have been scaled back considerably, however,” said Odendall.

“Following last week’s 25 basis point interest rate reduction, money markets are only pricing in slightly more than 100 basis points in additional cuts. This is almost 100 basis points less than was expected in late September, with the market now pricing in a Fed policy rate of 3.6% at the end of 2026.”

Although this could change, short-term rates are still declining in many major countries, including the US, the UK, and Sweden.

“If bonds yields keep rising, however, it will offset some of the impact of Fed cuts. After all, mortgage rates are linked to long bond yields, as are many types of loans to corporates. To use the finance jargon, financial conditions could tighten instead of loosening as intended,” said Odendaal.

“In an extreme scenario, the Fed could start hiking again if it sees signs of rising inflation and economic overheating. This is unlikely, but not impossible.”

Another factor that could complicate the future is Fed Chair Jerome Powell’s term, which ends in May 2026.

Trump could replace Powell with someone more pliant, undermining the Fed’s independence.

That said, the Fed won’t be undermined entirely as many top officials’ terms expire much later, and other top officials’ terms expire much later.

“Nonetheless, it would mean that the US loses monetary policy credibility at the same time as its fiscal credibility has already deteriorated. This could start shaking the foundations of global finance,” said Odendaal.

“Meanwhile, the challenge for Powell and his colleagues is that they can only make decisions based on the current inflation and employment outlook and cannot pre-empt a Trump presidency’s policies until they are implemented.”

South Africa

Looking back home, there are still question marks about whether the Trump administration will impose tariffs on imports from South Africa.

Attempts to retain duty-free access under the African Growth and Opportunity Act (AGOA) are guaranteed to be complicated.

Nevertheless, the outlook for the South African Reserve Bank’s interest rate cuts has not changed.

The Reserve Bank started its cutting cycle in September with a 25 basis point cut, and further cuts are expected in November and into 2025.

However, the SARB is expected to proceed with caution, given the unpredictability of US monetary policy.

“It helps that the rand has been remarkably resilient, only experiencing a brief wobble on the day the election results were released. South Africa should remain on the road of economic reform so that we can become more reliant on internal growth drivers in an uncertain global environment,” said Odendaal.

“For instance, if there is to be further upward pressure on global bond yields, we should expect spillover to domestic markets, i.e. higher local bond yields.”

“This makes it important to continue fiscal consolidation efforts and improve our relative standing in the eyes of investors. Securing credit rating upgrades could help and get off the Financial Action Task Force’s grey list. Doing so is fully in our own hands, not in Trump’s.”

Thus, Odendaal said that a Trump Presidency is not entirely good or bad news for investment portfolios, as the US economy tends to perform well regardless of whether a president is Democrat or Republican.

That said, Trump’s first-term experience suggests that things could become more volatile, with policies changing at short notice, requiring more patience from investors.

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