Reserve Bank cuts rates by 25 basis points but warns of Trump trade war uncertainty

The central bank’s Monetary Policy Committee (MPC) cut the key repo rate by 25 basis points on Thursday, a move justified by subdued inflation, but warned that an uncertain global environment with US President Donald Trump at centre stage clouded the outlook. 

The third cut in a row brings the South African Reserve Bank’s key repo rate to 7.50% and the prime lending rate to 11%, heralding more relief for hard-pressed consumers and businesses. 

South Africa’s consumer price index (CPI) ticked up to 3% year-on-year in December from 2.9% in November _ smack at the bottom of the SA Reserve Bank’s mandated 3% to 6% target range, vindicating its hawkish monetary stance in recent years. 

So far, so good. 

But the anticipated shockwaves that a Trump-triggered global trade war could unleash may bring the rate-cutting party to an end. Pointedly, two of the MPC’s six members voted to hold rates in the face of such uncertainty. 

The MPC is now like a war room girding for Trump’s trade wars.

“Given the challenging global environment, the MPC spent some time during this meeting reviewing a trade war scenario. This featured a universal increase of 10 percentage points in US tariffs, with retaliatory measures by other countries,” SA Reserve Bank Governor Lesetja Kganyago said in his prepared remarks. 

“The scenario showed higher inflation and interest rates globally, as well as greater risk aversion in financial markets. In response, our model projected the rand depreciating to nearly R21 to the dollar, with domestic inflation reaching 5% and the policy rate half a percentage point higher, at its peak, relative to the baseline forecasts.” 

The rand is currently fetching around R18.50/dlr and so this projection has modelled a massive slide in its value into uncharted territory.

This would stem from higher global interest rates to contain inflation – notably in the US – taking the shine off the rand’s appeal and raising risk aversion to emerging markets, which in turn would prompt the SA Reserve Bank to stop cutting and probably start hiking again.

“At our last meeting, we warned about a more challenging global environment. Some of the risks we saw then have since materialised. In particular, the outlook for monetary policy in the United States has changed,” the MPC statement said. 

“The space for rate cuts by the Federal Reserve now looks limited, with core inflation still elevated and new inflation risks emerging, such as rising tariffs on trade. It is even possible that US rates could go up again, to stabilise inflation.” 

This is a massive spanner that is being thrown into the works. South African inflation has slowed significantly from its recent peak of 7.8% in July of 2022 as the SA Reserve Bank has kept rates elevated and talked tough in an effort to anchor inflation expectations lower. 

At the same time, the rand’s relative strength last year and cooling oil and food prices have all combined to douse the flames of inflation. But Trump’s administration is now stirring the embers and looks set to pour petrol on the whole damn thing.

On the brighter side, the MPC looked at a scenario of accelerated domestic structural reforms, which it must be said is plausible if the Government of National Unity can hold.

“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,” the MPC statement said.

But the Trump administration is casting a shadow over this scenario while simultaneously underlining the need for urgent reforms. 

Enjoy the relatively low rates and slow inflation while you can. Trump 2.0 is threatening to undo the SA Reserve Bank’s hard work and South African consumers and the wider economy will bear the brunt of the ensuing fallout. DM