Big shift for interest rate expectations in South Africa

Reflecting broader global volatility in the past few weeks, economists are pushing out their expectations for an interest rate cut by the Reserve Bank this month.

What was previously seen as a potential cut of 25 basis points coming in the South African Reserve Bank’s July meeting, economists now anticipate a more cautious tone and a hold.

This follows a turbulent month in global markets, which were heavily disrupted by the sudden escalation of war in the Middle East in mid-June.

The decision by Israel to attack Iran sent global oil prices shooting up, which was exacerbated by the United States joining the fray and bombing the country’s nuclear sites.

Oil prices jumped from around $66 a barrel to over $88 a barrel in a relatively short period of time, before pulling back and stabilising close to previous levels.

However, the impact of the volatility on the global economy was pronounced, and markets are already feeling the sting.

According to Aluma Capital chief economist Frederick Mitchell, this volatility directly impacted South Africa, given its reliance on oil imports and the currency’s sensitivity to global shocks.

Because of the sudden spike in oil, local fuel price recoveries swung from a small over-recovery in mid-June (pointing to a cut) to an under-recovery of 50 to 80 cents per litre.

With a fuel price hike for July hitting this week, inflation is expected to rise, putting pressure on households.

Mitchell said that the geopolitical tensions only compounded South Africa’s domestic political uncertainty, notably related to refreshed tensions within the Government of National Unity (GNU).

The government’s stability was again rocked this week after the second-largest party in the coalition, the Democratic Alliance, again threatened to exit the GNU over the firing of one of its deputy ministers.

Ultimately, the GNU has held, but the rifts between the DA and the African National Congress (ANC) are clear and widening, giving markets and investors another thing to stress about.

Interest rates will be affected

Mitchell noted that the Reserve Bank’s decision to lower interest rates at the end of May was supported by the low inflation environment and improved exchange rate, alongside declining oil prices.

At the SARB’s Monetary Policy Committee (MPC) meeting in May, the panel voted five-to-one to cut interest rates by 25 basis points, with one dissenting vote calling for an even bigger cut of 50 basis points.

At the time, Reserve Bank governor Lesetja Kganyago acknowledged persistent global uncertainty from the United States’ trade policies, but indicated that there was room for a further 25 basis point cut.

Mitchell said that the lower interest rate “aims to stimulate demand by increasing household disposable income, especially for indebted consumers, amid sluggish economic growth.”

However, because of global uncertainty, including US monetary policy and geopolitical conflicts, caution is needed, he said.

“With the US Federal Reserve maintaining a hold on US interest rates until clearer inflation signals emerge, the SARB’s upcoming July policy meeting will likely adopt a cautious stance,” he said.

“The bank’s primary concern remains price stability, balancing supportive monetary easing with the need to avoid imported inflation driven by exchange rate swings and oil price volatility.”

Two other key factors would keep the Reserve Bank on the defensive and in caution mode.

The first is the pause on US President Donald Trump’s so-called “reciprocal tariffs”, which ends this month.

The tariffs, which included a 30% tariff on South African imports (minus key minerals and other commodities), were first announced in April but paused for 90 days.

The pause is expected to end on 9 July, and the White House has said that Trump has no intention of extending it further.

Without an approved trade agreement between South Africa and the United States, imposing the 30% tariff would significantly harm local exports and their associated industries.

The second big issue the SARB will have eyes on is how the United States will proceed with its own rate cycle.

Trump has targeted US Fed chair Jerome Powell, who has taken a very cautious approach to rate cuts. Powell held US interest rates at its June meeting, upsetting the president.

Trump has floated the idea of ending Powell’s term early—his term only expires in 2026—and appointing a more favourable chair.

According to Investec chief economist, Annabel Bishop, markets now worry that the appointment of an overly dovish Central Banker would cause market instability by cutting interests too quickly and by too much, then be at risk of fuelling inflation.

This would fuel inflation, and “then would likely result in the need to hike interest rates quickly, causing the instability in financial markets, and risking global financial markets losing faith in the Fed, weakening its ability to resolve financial crises.”

While the South African Reserve Bank does not necessarily track US rate moves exactly, it is a key factor that is considered when setting local policy, given the interest rate differential’s impact on the rand.

Thus the central bank will be left mulling many conflicting and often volatile factors when plotting its next step forward.

The SARB’s MPC will meet at the end of the month, with the next rate decision expected on 31 July.