Good news gets better for interest rates in South Africa

Expectations on interest rates in South Africa have turned even brighter after markets recovered from the shock of April, with economists now seeing a 50 basis point cut from the Reserve Bank on the cards.

According to Stonehage Fleming Investment Management Associate Director, Jan-Daan van Wyk, markets experienced wild swings last month as the US tariff war coincided with South Africa’s political tensions and budget drama.

This led to a multi-trillion-dollar sell-off globally, and investors taking major step back locally, waiting for the dust to settle.

Fortunately, just as quickly as things dropped off, markets turned when the impact of the tariffs were less violent than expected—thanks in large part to “reciprocal” tariffs being paused—and the government of national unity held firm.

As a result, expectations on interest rates took a big swing from an indefinite hold, likely into 2026, with economists now pencilling in 50bps of more cuts before the end of the year.

Van Wyk said markets consider South Africa’s current monetary policy tight, with a real repo rate of 4.3% compared to the neutral estimate of 2.5%.

“The South African Reserve Bank still has room to move after cutting the repo rate by 0.25% to 7.5% in January and holding it steady in March,” he said

He noted that the large difference between the real and neutral repo rates gives the central bank flexibility to respond to economic challenges.

Money markets are pricing in an additional 50 basis point cut to rates within the next year, creating a potential buffer against growth shocks.

This echoes sentiments from Investec chief economist, Annabel Bishop, who posited earlier this week that the SARB could cut rates by 25 basis points twice this year—in July and again in November.

Following the US Fed’s hold on Wednesday, Bishop said that if the US only cuts rates twice this year—instead of the three forecast—South Africa may only cut rates once (25bps).

Both Bishop and Van Wyk pointed to risk scenarios that could change the SARB’s outcome, with the latter noting that the central bank continues to view inflation risks as skewed to the upside.

Cautiously optimistic

While the SARB tends to err on the side of caution, Van Wyk said there are ample reasons to be “prudently optimistic” about South Africa’s financial markets.

This is based on several fundamentals that should sustain the performance of South African assets.

One of these is Operation Vulindlela, which saw the launch of phase two this week by president Cyril Ramaphosa.

Van Wyk said that OV remains largely insulated from tensions within the GNU developments, which allows structural reforms to continue regardless of fractured coalition politics.

The cohesion of the GNU has been under severe strain, facing its first significant test with the national budget.

The relationship between GNU’s biggest parties—the ANC and the DA—deteriorated further
in early April when the DA voted against the budget, creating profound uncertainty about South Africa’s governing arrangement.

While the GNU has held firm, the budget has still not passed, and there have been growing calls from within to restructure the composition of the grand coalition.

Despite this, markets feel assured that the government’s reform agenda will continue, although various risk scenarios exist.

In addition to Operation Vulindlela, Van Wyk highlighted the government’s infrastructure investment programme, which also remains on sound footing.

Private Sector Capital Expenditure is also increasing, particularly in mining, manufacturing, and
construction, though recent developments may dampen this momentum.

Van Wyk added that corporate resilience remains strong, South African equities are trading at a discount to emerging market peers, and inflation looks to be under control.

All these make the landscape ripe for a more flexible monetary policy and rate cuts.

Van Wyk said that for the view on the markets to turn unreservedly optimistic again, the global and local challenges undermining broad economic and financial market prospects must get back onto an even keel.

However, this could prove challenging, he said.