Another big shift in interest rate expectations for South Africa

The pendulum keeps swinging for interest rate expectations in South Africa, with economists now seeing greater chance for the South Africa Reserve Bank (SARB) to still cut this year.

However, the baseline expectation remains that rates will be held at the May meeting, as global uncertainty persists.

The tone around the interest rate cutting cycle has shifted several times this year. The cycle started with the SARB cutting rates by 25bps in September 2024, followed by another 25 bps cut in November and January 2025.

2025 started out with expectations of a continued cutting path through to May—another 50bps in total—however, this was paused with a vote to hold rates in March.

This followed a seismic shift in global politics as US President Donald Trump signed a flurry of executive orders after taking office in late January.

This caused global uncertainty, pushing expectations for further cuts to the middle or end of the year. Then the US launched a global tariff and trade war in April.

After this, key central banks, including the SARB, signalled that any further interest rate cuts would have to wait until the dust settled—possibly until 2026.

Now a month later, uncertainty still persists in the global market, but economists have noted that the fallout isn’t as bad as expected.

Investec chief economist Annabel Bishop said that markets have not nosedived, an indication that investors view Trump’s tariff war as temporary.

On top of solid employment data, expectations of US interest rate cuts have now swung into more positive territory with three 25 basis point cuts now expected before the end of the year, she said.

Should this become the base view, it will likely feed into local expectations as well.

According to Aluma Capital chief economists, Frederick Mitchell, the US Fed has taken a cautious stance to its rate policy, and is likely to hold rates steady at its meeting in May.

“The primary concern for the Fed remains inflation, which is subtly rising due to persistent tariff-induced import price increases stemming from the ongoing trade conflict with China,” he said.

“These tariffs have increased costs for imported goods, contributing to inflationary pressures above the Fed’s 2% target.”

That said, the recent robust employment data suggests a resilient US labour market, supporting calls for rate cuts.

What it means for interest rates in South Africa

Mitchell noted that South Africa’s economic environment is heavily influenced by external factors, and the SARB will be taking local inflation figures and global events into account.

March 2025 inflation figures showed consumer inflation at 2.7% and producer inflation at 0.5%, both comfortably below the SARB’s 3-6% target range.

“Despite these stable inflation numbers, demand remains subdued, influenced by high living costs, stagnant wages, and a cautious lending environment,” Mitchell said.

The rand has recently strengthened against the US dollar after crumbling on diplomatic tensions and the suspension of US aid, as well as concerns over South Africa losing trade privileges in AGOA.

Further positives for South Africa are declining oil prices over the past month and lower import costs, reducing inflation pressures further.

Mitchell said that these external conditions may justify a shift towards easing monetary policy.

“A rate cut could stimulate borrowing, increase consumer spending and in doing so help to bolster domestic demand without risking an uptick in inflation,” he said.

However, the economists noted that the SARB is likely to proceed cautiously, bearing in mind that geopolitical uncertainties and external shocks could offset the benefits of lower interest rates.

Mitchell noted that the clear line that central banks like the Fed and SARB are treading is one of caution as they try to navigate the uncertainties in the market.

South Africa could pivot toward rate easing if external conditions remain favourable, the rand remains relatively stable against the dollar, and oil prices keep the downward trajectory.

“The strength of the rand and lower oil prices are particularly significant for South Africa’s inflation outlook, potentially allowing the SARB to lower interest rates further to stimulate growth,” he said.

The SARB’s own modelling shows room for another 25 basis point cut to rates before reaching the ‘neutral’ rate.

With the latest shift, this is now seen as back on the cards for 2025, either at the July, September or November meeting.