US President Donald Trump’s unpredictable economic policies are pressuring the SARB to tread cautiously on interest rates, despite lower inflation projections for 2025. Vernon Wessels explains why the rand's stability and investor confidence remain key challenges.
Highlights:
- US President Donald Trump’s economic policies — like protectionist tariffs and deregulation — are causing global inflation concerns.
- The SARB’s main goal? Rand stability. Vernon notes that if South Africa’s rates drop too quickly while US rates stay high, investors could pull out, weakening the currency.
- Economists like Vernon Wessels and Azar Jammine remain cautiously optimistic about South Africa’s growth prospects, projecting a stronger rand and GDP growth of 1.7% for 2025, provided key structural challenges are addressed.
The unpredictability that accompanies US President Donald Trump and his economic policies threatens to undermine South Africa’s gains against inflation. Even so, the picture looks better than it did in 2024.
Uncertainty about the impact of US President Donald Trump’s economic policies is rapidly reducing the likelihood of more interest rate cuts in South Africa. And that’s despite the probability that inflation will be lower this year than in 2024.
Right now, South Africa finds itself caught in the crossfire of Trump’s protectionist measures, which threaten to push prices for goods higher worldwide and force central banks, including the South African Reserve Bank (SARB), to tread cautiously on monetary policy. Notwithstanding an already humming US economy, which itself is inflationary, the US president also plans to cut taxes, deregulate industries (from financial services to energy), boost defence spend and invest big in AI.
SARB governor Lesetja Kganyago, for one, isn’t chuffed. Speaking to Bloomberg TV at the World Economic Forum, he said the moves would undo “the disinflation process that … central banks had so steadfastly worked on since the great inflation of 2022”.
Inflation under the SARB’s hawkish stance has been kept well below the upper limit of the bank’s 3%-6% target since mid-2023. In October, November and December, price gains came to 2.8%, 2.9% and 3%, all beating the consensus estimates of analysts polled by Bloomberg.
Inflation averaged 4.4% in 2024, and economists, such as Nedbank’s Johannes Khosa, project it will average 4% in 2025.
Nedbank now expects just two cuts of 25 basis points (bp) each this year – one in January and another in March, scrapping a previous projection for a third reduction.
“Prices in the US are going to be sticky, so the Federal Reserve is likely to slow the pace of interest rate cuts. The SARB will be mindful of that, so we believe they’re probably not going to be as aggressive as we earlier expected,” says Khosa.
Rand stability
The SARB’s caution is largely driven by its need to stabilise the rand. If South Africa’s rates fall too far or too fast compared to US rates, American assets become more appealing, drawing capital away from South Africa and potentially weakening the currency. You can see that in the Fed’s more aggressive 100bp cut in rates since its most recent easing cycle began, compared to the SARB’s 50bp cuts.
Economist Waldo Krugell from the North-West University believes Trump’s “America First” policies may spell “bad outcomes” for South Africa.
While much of the focus lies on tariffs, “the greater danger is that the Trump administration will pay little attention to the rules of the World Trade Organisation”, he wrote in a note this week. This would affect South Africa if the US charges additional tariffs on steel, cars or citrus.
“We would like to cut interest rates further, but will not be able to do so if US rates remain high and the rand-dollar exchange rate is weaker,” said Krugell.
Capital Economics Africa economist David Omojomolo is more optimistic than his peers, predicting that the monetary policy committee (MPC) will cut its benchmark repo rate to 7.5% next Thursday, and down to 6.25% by the end of the year. Following the January 30 meeting, Kganyago and his team have another five meetings in 2025, which would imply a cut of 25bp at each of those sittings.
“We think inflation will stay subdued due to lower global oil prices and a large degree of spare capacity in the economy,” Omojomolo says. “The SARB will also be encouraged by the rand’s recent recovery.”
In its November 2024 statement, the MPC noted that South Africa’s economy continues to operate below its full potential, with an output gap of -0.4% in 2024 and -0.1% forecast for 2025. This indicates room for economic expansion without stoking inflation. The SARB projects GDP growth of 1.7% in 2025, up from an estimated 0.9% in 2024, and 2% by 2027 – provided that the government addresses critical bottlenecks such as energy supply and logistics, not to mention creating a more investment-friendly environment.
Reason to be optimistic
Azar Jammine, chief economist at Econometrix, is optimistic about the South African economy and the rand for the first time in years. “It’s been a long time since I’ve forecast economic growth and a rand outlook that isn’t overly negative,” he tells Currency.
He believes the rand could dip below R18/$ in the “not too distant future”, with any potential weakness only emerging in 2026 as investors begin contemplating who will succeed President Cyril Ramaphosa. Currently, the rand trades at about R18.50/$.
While economic growth is forecast at between 1.5% and 2%, Jammine says: “There is a chance that growth actually exceeds that, and the likelihood of that happening is just as high as the possibility of growth falling below 1%.”
Jammine also highlights the possibility that South Africa might be removed from the Financial Action Task Force’s greylist later this year. Such a move, aimed at acknowledging the country’s improved measures to combat financial crimes, would likely boost investor sentiment.
Still, that won’t help interest rates, and Jammine expects only two cuts from the SARB.
North-West University’s Krugell wrote that Trump’s influence on the domestic fortunes of the US “might pay dividends, but his four-year term will do little to make South Africa’s economy great again”.
And that is up to almost everyone other than the SARB.
Top image: US President Donald Trump. Photograph: Robert Perry/Getty Images. Illustration: Currency
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