Surprise twist for interest rates in South Africa

With a recession in the United States now seen as a baseline, economists anticipate some drastic interest rate cuts to follow later in the year—with the same possible for South Africa.

This could see a reversal of the slow-paced and cautious rate cut path the country is currently on, and runs counter to the SARB’s risk assessments. But it also comes with some big caveats.

United States President Donald Trump’s new tariffs kicked in today, with South Africa expected to be hit by a 31% tariff on goods. 

Although questions remain on the logic of how the United States calculated its ‘reciprocal tariffs’, they have already had a disastrous effect on the global economy, with worse expected to come.

When it comes to South Africa, the country’s direct trade exposure to the USA is relatively limited. US data indicates a $9 billion trade deficit, while local figures point to a $2 billion gap. 

South Africa is one of the countries that faces significantly higher tariffs.

While some exports like gold and metals have been exempt, the country’s automotive and agricultural sectors will be hit hard.

According to Old Mutual Group Chief Economist Johann Els said, this is enough to hit the South African economy, but not broadly.

So while growth forecasts have been cut, a local recession isn’t seen on the cards.

“China and the Euro Area, South Africa’s primary trading partners, are expected to adopt accommodative policy stances, which should help offset lost momentum,” Els said.

However, Els said that a US recession is now his base case because of the tariffs.

What it means for interest rates

The US Federal Reserve is expected to respond by holding out in the near term to see where markets are heading, with no change in rates anticpated at its May meeting.

However, the Fed could start cutting deeply and rapidly later in the year, depending on how bad the economic downturn is.

Els said the Fed could initiate a rate-cutting cycle from June onward, potentially delivering up to 125 basis points in cuts over the remainder of 2025.

This is a massive shift in expectations from the slower pace of cuts, or even interest rate hikes seen at its last meeting.

“Depending on the downturn’s severity, front-loaded moves of 50 or even 75 basis points are possible,” Els said.

At the same time, Els expects the US dollar to weaken further, potentially reaching $1.15 to the euro by mid-year and $1.20 by year-end.

With steep interest rate cuts potentially coming from a US recession, and South Africa having a more supportive environment, Els said there is room for more rate cuts locally.

Inflation risks for South Africa have shifted to the downside, supported by stable oil prices.

Should inflation dip below 3% in Q2 and the global rate cycle turn, the SARB could find room to begin cutting interest rates from mid-year, said Els. 

A cut would see the repo rate drop from 7.5% and the prime rate from 11.0%. 

The Reserve Bank cut rates in September, November and January 2025 after inflation dropped to below the bottom of its 3% to 6% target range. 

The cuts reduced the repo rate from a 15-year high, which was caused by a rapid rise in inflation due to increased fuel costs, higher load shedding and global economic shocks. 

The SARB did not cut interest rates in March in a close four-two split, with the Monetary Policy Committee primarily focusing on global external shocks to South Africa. 

SARB Governor Lesetja Kganyago, however, said its forecasts see rates stabilising at a neutral level of about 7.25%—implying at least one more 25 basis point cut this year.

However, analysts and experts—particularly from the property sector—say there is room for even more.

The catch

The real risk in play is the rand.

Despite dollar weakness due to the threat of recession, the rand has crumbled due to the confluence of local and global issues.

As with other economists, Els pointed to instablity in the Government of National Unity (GNU) as a major problem for the rand.

Deep ructions in the grand coalition were exposed after the DA, the second biggest party in the GNU, voted against the budget and the ANC, leading the GNU, sidelined its partners to find outside support.

“The uncertainty around the GNU and the DA continued participation is a cause for concern for confidence and investor sentiment,” Els said.

“After the formation of GNU mid-year in 2024, there was improved confidence on the ability of the government to implement the right policies to make sure the economy runs stronger.” 

The ANC has since called for a reset of the GNU and has decided to enter into talks with parties outside the coalition on a path forward.

While the party insists the GNU will continue no matter the makeup of the partners inside, some economists have predicted a crash in the rand to over R22/$ should the DA exit.

Rand weakness at those levels will have a significant impact on inflation and the cost of living, diminishing the chances of interest rate cuts.