Big shift for interest rate expections in South Africa

 ·22 Jan 2025

Economists and the Reserve Bank have shifted their views on interest rate expectations in South Africa in the wake of Donald Trump becoming president in the united states.

Expectations have shifted from a more rapid but small series of cuts in early to mid-2025 to a much slower fall of only one or two cuts in the entire year.

Investec chief economist Annabel Bishop noted that a 25bp cut in the repo rate is expected in the January meeting—an announcement scheduled for 30 January—but no cut at the March MPC meeting, which was the position near the end of last year.

The economist said that South Africa’s interest rate cut cycle is expected to slow this year after two cuts in quick succession at the end of last year.

The SARB is not expected to ease interest rates again “until July at least.”

“South Africa’s Forward Rate Agreement curve has only priced in around one 25bp cut in the repo rate this quarter, and has priced in little further—but is not a good longer-term predictor of MPC interest rate decisions,” Bishop said.

The reason for the shift is the change in pace projected for US interest rate cuts, where expectations have moderated from three 25bp drops in 2025 to one definite 25bp drop, and currently just under a 70% chance of a second for this year.

The US rate slowdown follows US president Donald Trump’s ascension and expected market turmoil.

Bishop said that, while markets have eased off on major shocks—especially in relation to tariffs on imports—threats remain, particularly for Canada and Mexico. Fewer rate cuts than expected in the USA is a risk to the rand.

South African Reserve Bank Governor Lesetja Kganyago also highlighted the problems with a Trump presidency, warning that US protectionist policies could fuel inflation and risk derailing future interest-rate cuts.

Speaking to Bloomberg, the governor said that there are currently too many “moving parts” to be certain about the outlook.

“To the extent that the measures taken are inflationary, it could slow down the disinflation process that the central banks had so steadfastly worked on since the great inflation of 2022,” Kganyago said.

The risk is that “the reduction in the restrictiveness of monetary policy that we had seen over the past year could then be brought to an abrupt halt.”

Central banks, including those in the US, the European Union and South Africa, began lowering rates last year as inflation started easing.

However, other proposed policies, such as trade tariffs on imports from China, could create ripple effects for emerging markets like South Africa.

“Trade wars could weaken global growth and pressure the rand, but aggressive Chinese economic stimulus could benefit South Africa as a key commodity exporter,” Maarten Ackerman, chief economist at Citadel Investment, said in an emailed note.

Risks to the SARB’s inflation outlook include higher domestic energy prices and a weaker rand.

The rand, a bellwether for emerging-market currencies, has depreciated almost 7% against the dollar since Trump won the US election on 5 November.

“We have got to continuously assess the balance of risk and calibrate policy accordingly,” Kganyago said.

Annual inflation data, set for release on Wednesday, 22 January, is expected to show cost increases accelerated to 3.2% last month from 2.9% in November to average 4.5% in 2024, in line with the MPC’s forecast and at the midpoint of the bank’s target range.

Policymakers foresee inflation averaging 4% this year.

With Bloomberg

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