The Reserve Bank, anticipating a raft of tariffs under US President Donald Trump's new administration, has reviewed a “trade war” scenario and the impact it could have on domestic inflation, the rand and future interest rate decisions.
“This featured a universal increase of 10 percentage points in tariffs with retaliatory measures by other countries. The scenario showed higher inflation and interest rates globally as well as greater risk aversion in financial markets,” governor Lesetja Kganyago said on Thursday.
“In response, our model projected the rand depreciating to nearly R21 to the US dollar, with domestic inflation reaching 5% and the policy rate half a percentage point higher at its peak relative to forecast.”
The Bank's monetary policy committee (MPC) announced a 25 basis point cut to the repo rate, bringing it down to 7.5%. Four MPC members favoured the cut while two preferred keeping rates on hold as inflationary risks emerged from tariffs and protectionist trade policies taking hold during Trump’s second term.
Kganyago said they also looked at a scenario of accelerated structural reforms to the economy and the positive impact these could have on growth, inflation and interest rates if they are speedily and fully implemented.
“This showed growth picking up gradually, getting to 3% in 2027. Importantly, this scenario also showed lower inflation and lower interest rates in South Africa, demonstrating how structural reforms can reduce the country's risk premium and create more monetary policy space.”
He said that while inflation was now at the lower end of the target band, inflationary risks could not be ignored.
“Yes, inflation is low. [It is the] outcome of two things: policy decisions of the past and positive supply shocks. The two positive supply shocks were the exchange rate and the oil price. If you look at what has happened since; we have had four consecutive months now of rising petrol prices. At some stage, the negative inflation that we had seen in the fuel price will get out of the system.”
Treasury economist at Investec, Tertia Jacobs, told Business Times the upside risks to the Bank's inflation forecast were trade tariffs and fewer rate cuts in the US. A reversal from a bias towards rate cuts to rate hikes in the US could be even more negative for emerging market currencies such as the rand, affecting foreign capital flows.
The MPC signalled that further interest rate cuts will be dependent on how the inflation forecast risks unfold. This relief combined with the interest rate cuts last year will provide some support for the South African economy in the year ahead
— Elna Moolman, Standard Bank Group head of South Africa macroeconomic research
She said if a trade war did occur, China could look to diversify exports to countries other than the US or depreciate its renminbi currency, which in turn could impact exports and exchange rates. However, the implementation of the Trump administration's policy agenda was still unfolding.
The International Monetary Fund (IMF) concluded its consultation with South Africa on Thursday, noting that the economy still faced power shortages and disruptions to rail and port operations, which constrained growth to 0.7% in 2023 and subdued activity in 2024.
“Nonetheless, power generation was stabilised and, following the formation of a reform-oriented government of national unity in June, consumer, business, and investor confidence rebounded. Inflation moderated from 5.9% in 2023 to an estimated 4.5% in 2024, with the central bank cutting interest rates by 50 basis points in 2024,” the global lender said in its assessment.
Standard Bank Group head of South Africa macroeconomic research, Elna Moolman, said the MPC decision reflected the currently benign inflation pressure and expectations that inflation should remain within the target range. She said concerns around inflationary risks were understandable.
“The MPC signalled that further interest rate cuts will be dependent on how the inflation forecast risks unfold. This relief combined with the interest rate cuts last year will provide some support for the South African economy in the year ahead and we expect a notable improvement in economic growth this year relative to last year.”
Hannah de Nobrega, an economist and quantitative analyst at Prescient Investment Management said while the Bank's decision to cut by 25 bps was in line with market expectations, it could be seen as cautious with a high potential volatility in 2025.
“However, not only is the cut good for households and businesses but it is also encouraging for the National Treasury’s focus on growing South Africa’s economy by cutting costs. With plans for structural reform in the energy and transport sectors.”
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