Warning for interest rates in South Africa

Significant changes in the world’s largest economy have led to serious questions over South Africa’s interest rate trajectory.

South Africa’s interest rate trajectory is looking less certain following the reelection of Donald Trump in the USA.

Old Mutual Wealth Investment Strategist, Izak Odendaal, said that the US economy is in a different space than it was when Trump took over as President in 2016.

Before Trump’s first term in 2016, the US economy was in a soft patch, with real GDP growth of roughly 1.5%b below what was considered full capacity.

Inflation at the time was also low, a sign of economic slack or idle resources.

Real growth in South Africa is now close to 3%, above estimates of the long-term trend.

“While enough voters were unhappy with the state of the economy to defect from the Democratic Party, the fact remains that unemployment is near a record low,” said Odendaal.

“Plans to deport illegal migrants or just stem the flow of incomers could result in worker shortages. Today, inflation is not as high as it was two years ago but remains above the Federal Reserve’s 2% target, and the decline stalled out in recent months. “

“Thus, it seems unlikely that the Federal Reserve will cut rates as much as was expected a few months back.”

South Africa will also need to wait and see if its exports to the US are hit by increased tariffs. Trump already plans to impose large tariffs on China, Mexico and Canada.

“As the US interest rate outlook shifted, it has put upward pressure on the dollar and downward pressure on the rand,” said Odendaal

This ultimately also shifts the outlook for domestic interest rates, warned Odendaal.

The South African Reserve Bank (SARB) recently cut rates in both September and November, bringing the repo rate down from 8.25% to 7.75%.

Inflation in South Africa currently stands at 2.8% – the lowest in four years and well below the SARB’s midpoint target of 4.5%.

Despite the risk of Trump, economists and analysts expect further drops in the coming Monetary Policy Committee (MPC) meetings, with another 50 basis points worth of cuts widely expected in 2025.

New currency fears

Concerns around Trump also extend into the ‘proposed new’ currency for BRICS countries.

Following its recent expansion, BRICS now includes Brazil, Russia, India, China, South Africa, Iran, Egypt, Ethiopia, and the United Arab Emirates.

Trump warned that BRICS countries that create a shared currency or back another currency to replace the dollar would be hit by 100% tariffs.

“He is largely attacking a straw man here since the idea of a BRICS currency remains a fantasy,” said Odendaal.

South Africa’s government has also put water on the fire, stating that there are no plans to create a so-called BRICS currency.

“Recent misreporting has led to the incorrect narrative that BRICS is planning to create a new currency,” said the Department of International Relations and Cooperation.

“This is not the case. The discussions within BRICS focus on trading among member countries using their own national currencies.”

Although BRICS has called for reforms to the international financial system, it has stopped short of agreeing on the adoption of a new currency. 

“South Africa supports the increased use of national currencies in international trade and financial transactions to mitigate the impact of foreign exchange fluctuations, rather than focusing on de-dollarisation,” said DIRCO

“The strengthening of correspondent banking networks and the development of infrastructure for settlements in national currencies could further this aim.”

Read: The good and the bad for South Africa heading into 2025