The one thing that could stop an interest rate cut next week

While inflation has slowed, the rand has strengthened, and global markets have settled down, the 90-day on US President Donald Trump’s “reciprocal” tariffs has not yet lapsed, keeping policymakers on edge.

Global markets have swung wildly over the past month after a US-led trade war erupted in early April and ended in a ‘ceasefire’ of sorts in May.

Trump initiated the war on 2 April, announcing a 25% tariff on all vehicle imports to the United States, followed by a universal 10% tariff on all countries days later.

The pièce de résistance for the US president’s America-first trade policy was a so-called “reciprocal” tariff on 60-plus countries with significant trade imbalance with the United States.

These tariffs ranged from 11% to 50%, calculated based on each country’s trade balance rather than actual trade policy, and were set to come into effect on 9 April, Trump’s “Liberation Day.”

Following a massive market crash in the US, the Trump administration hit pause on the tariffs, suspending them for 90 days. However, things escalated with China.

The US-China trade war dominated market forecasts throughout April and May, leading to significant cuts to global GDP expectations, taking all tied markets with it.

In the past week, things between the world’s two biggest economies have de-escalated significantly, with the US and China both cutting back their tit-for-tat tariffs significantly and calling a truce.

According to Old Mutual Wealth Investment Strategist, Izak Odendaal, the most extreme scenarios related to the trade war are now unlikely thanks to this de-escalation.

However, he warned that the current pause should be rather seen as a ‘ceasefire’ rather than an end to the war, and that “more uncertainty and, probably, volatility lies ahead”.

“The bad news is that this is unlikely to be the end of Trump’s trade wars. But for now, we can all sleep a bit sounder,” he said.

A big factor in interest rates

Odendaal noted that the trade war and related market conditions have been a big factor in play with interest rates and how central banks have been approaching them.

The market uncertainty created by the escalations put the US Federal Reserve in a strict wait-and-see mindset.

It kept interest rates unchanged at its last three meetings, including the most recent one in early May.

“Fed officials will feel vindicated that this has been the right course of action. Like the rest of us, they did not know what would happen to tariffs. And we still don’t know,” Odendaal said.

For central banks outside the US, the situation was easier.

“The trade war is a demand shock that risks sending growth and prices lower, and interest rate cuts are a tried-and-tested response,” the strategist noted.

Since 2 April, 15 central banks, including the Bank of England, the European Central Bank, the Bank of Mexico, and the People’s Bank of China, have cut interest rates.

The South African Reserve Bank (SARB) tends to be more hawkish and overly cautious, along with being more closely aligned to Fed moves, due to the interest rate differential’s impact on the rand.

However, Odendaal said even the SARB’s Monetary Policy Committee is likely to be moving in the direction of cuts.

“If global market conditions stabilise, the Reserve Bank can put more emphasis on domestic inflation dynamics,” he said.

Consumer inflation fell below its 3% to 6% target range in March, meaning that the real repo rate is now sitting at 4%.

The rand oil price is 20% lower than a year ago and will detract from inflation readings for the next few months until base effects kick in later this year.

All indicators are lining up for an interest rate cut, with some economists expecting one as early as May’s meeting on the 29.

But Odendaal said it is likely to be a close call because the world is only in the middle of the 90-day pause on Trump’s “Liberation Day” tariffs.

This means that the cautious SARB could likely keep interest rates on hold until the full period has played out.

“By the July meeting, the MPC—and the rest of us—will know what happens after the 90-day tariff pause passes,” he said.

“Further interest rate relief will support the nascent recovery in consumer spending; however, the extent of rate cuts could be limited by a shift to a lower inflation target.”