Bad news for interest rates in South Africa

Economists at Nedbank say South Africans should not hold out any hope for further interest rate cuts in 2025, with the South African Reserve Bank (SARB) left with nothing but difficult choices.

The bank published its Guide to the Economy for the first quarter of the year, outlining the abject chaos brought about by US President Donald Trump’s global trade war.

The group’s economists noted that even though Trump walked back ‘reciprocal’ tariffs against 60 or so countries for 90 days, his escalations with China have made the “dreaded trade war” a reality.

As such, global economic growth is expected to slow, inflation is expected to creep higher, and, amid the heightened uncertainty, central banks are left throwing previous plans out the window.

The bank said this is also true for the SARB, where it has been left with no easy choices. South Africans will see that play out through a likely hold on interest rates for the rest of the year.

The SARB’s Monetary Policy Committee (MPC) left the repo rate at 7.50% at its March meeting, following cuts of 25 bps at each of the previous three meetings in September, November and January.

“While the MPC expected inflation to remain contained over the short term, it feared that a global trade war could unsettle the rand and lead to renewed price pressures over the medium term,” Nedbank said.

The MPC probably also noted the Fed’s growing caution, understanding that a prolonged pause or even tighter monetary policy by the Fed could amplify the downward pressure on the rand.

While stressing the upside risks, SARB lowered its inflation forecasts to only 3.6% in 2025 and 4.5% in 2026 and 2027.

The central bank expected lower oil prices to dampen the impact of the VAT rate hike, a weaker rand, and higher electricity tariffs over the short term.

Nedbank said it expects the MPC to remain cautious in the face of global uncertainty.

Notably, the MPC had already voiced its trade war concerns in March, but they “probably unfolded in a far more dramatic and disruptive manner than they envisioned,” Nedbank said.

“With the tariff drama still evolving, the outlook for all drivers of domestic inflation remains highly uncertain,” it said.

Multiple scenarios, but likely to stay on the side of caution

That said, nothing is set in stone and given the high levels of volatility and unpredictability, the situation can change rapidly.

Nedbank said that much will depend on how US trade policy impacts its economy and how the Fed responds.

This could lead to a scenario where the MPC has room to cut interest rates—but this is not the base expectation.

“If the US economy weakens significantly or enters technical recession, the Fed would probably cut interest rates as growth concerns outweigh inflation fears,” it said.

“Under such circumstances, the rand would stabilise, allowing the MPC to cut interest rates further.”

However, if US inflation rise sharply and the economy slows only moderately, the Fed would probably leave interest rates on hold. Against such a backdrop, the USD would rebound, Nedbanks said.

If the US economy weakens less than the rest of the world, the USD could rally off lower levels. This would keep the rand under pressure and cause the MPC to pause for a prolonged period.

This is the scenario alluded to by the SARB itself, with the latest Monetary Policy Review suggesting that new risks have emerged that suggest interest rates will remain higher for longer.

Reserve Bank Governor Lesetja Kganyago said the economic developments projected in October 2024 have all but evaporated, leading to high economic uncertainty at home.

“Given the uncertainty, we think the MPC will keep interest rates on hold until there are fewer moving parts to consider,” Nedbank said.

“The SARB will likely leave interest rates unchanged for the rest of the year.”