Traders have reduced their expectations for interest rate cuts in South Africa this year, with markets now factoring in only one rate reduction, as they assess the Federal Reserve’s cautious approach on rates and the impact of president-elect Donald Trump’s tariff policies.
Forward-rate agreements, which reflect speculation on borrowing costs, are currently anticipating just a single 25-basis-point rate cut during the South African Reserve Bank’s January 30 monetary policy committee (MPC) meeting, Bloomberg reported.
Marek Drimal, a strategist at Societe Generale in London, noted in a client report that the central bank may even postpone the rate cut until March, given unfavourable market conditions and external financial factors.
This viewpoint diverges from the expectations of many economists, who predict two 25-basis-point cuts during the first quarter of 2025, reducing rates to 7.25%, followed by a further reduction by the third quarter.
These cuts would bring the total easing since September to 125 basis points.
Governor Lesetja Kganyago has consistently stressed that the MPC will proceed with caution regarding rate cuts, given the uncertain economic outlook, even though its models indicate potential future cuts.
“We should not be creating uncertainty by making moves that we would later regret,” Kganyago said in a recent CNBC Africa interview.
Since the MPC’s last meeting on November 21, the rand has depreciated by 4.5% against the dollar, amid concerns that the Federal Reserve might reduce rates less aggressively due to a robust US economy and Trump’s tariff policies.
This weaker rand has already contributed to higher fuel prices, and it may challenge the central bank’s inflation forecast of 4% for 2025.
The Reserve Bank aims to anchor inflation expectations around the 4.5% midpoint of its target range.
Investec’s chief economist, Annabel Bishop, has indicated that South Africa’s inflation rate is likely to average above 4% year on year, citing multiple risks to the 2025 economic outlook, including global geopolitical tensions.
Markets remain cautious regarding Trump’s policies, as his actions could have an indirect influence on South Africa’s monetary policy.
Nolan Wapenaar, co-chief investment officer at Anchor Capital, told Business Report that “a rate cut in January is, in our view, a coin flip.
With the US Federal Reserve turning more hawkish in December, we believe the SARB will hold rates steady in January and possibly wait for the next meeting to initiate the first cut of 2025.”
“We don’t think the SARB will pay as much attention to President Trump as they will to developments at the US Federal Reserve,” he added.
Bishop also noted that the rand began the year at R18.78/USD, after reaching R17.60/USD in December. Since then, it has weakened, reaching above R19.00/USD.
The US dollar has strengthened, driven by stronger-than-expected US data and growing focus on the incoming Trump administration.
Market sentiment remains sensitive, and with recent US job numbers and economic growth data surpassing expectations, markets are now factoring out the likelihood of further interest rate cuts in the US this year.
Fed funds futures now indicate a 100% probability of a 25-basis-point rate cut by December 2025, moving away from earlier expectations for a June cut.
As a result, emerging market currencies, particularly the rand, are weakening, as capital flows into emerging markets are expected to slow.
The US dollar has also gained as risk aversion rises due to market uncertainty, exacerbated by statements from president-elect Trump. His policies are expected to reduce global certainty, which could further impact the outlook.
This increased uncertainty may drive further rand weakness, particularly with the anticipation of higher tariffs following Trump’s inauguration, reinforcing inflationary pressures and reducing expectations for US rate cuts, which in turn strengthens the dollar, said Bishop.
