The Reserve Bank’s Monetary Policy Committee (MPC)—scheduled to meet at the end of of May—will likely vote to hold rates once again as markets digest the chaos of April.
According to Old Mutual Wealth Investment Strategist, Izak Odendaal, the SARB will likely want to “sit on its hands” as the ripple effects of the US trade war hit wider markets.
It will continue to hold this position until things settle down, he said.
The trade war, launched by US President Donald Trump in early April, sent shockwaves across the globe causing stocks to crash and a sell-off in US bonds.
The White House launched trade salvos at friends and foes alike, followed by dizzying retractions and escalations all happening at the same time.
Trump started with a 25% tariff on automotive imports starting 2 April. This was followed by a 10% global tariff on imports from 5 April, and a ‘reciprocal’ tariff up to 50% on select countries from 9 April.
As markets panicked at the launch of the reciprocal tariff, crushing the bond market, Trump quickly hit reverse, pausing tariffs exceeding 10% for 90 days—except for those on China.
For China, Trump moved in the opposite direction, escalating tariffs in tit-for-tat retaliation to a 145% tariff level against the world’s second-biggest economy.
Odendaal said that the problem with the tariffs, and the chaotic way that they have been implemented, is that the real effects are likely only to be felt further down the line as they filter through economies.
For the US central bank, the Federal Reserve, this puts it in a difficult position as the United States now faces both weaker growth and higher prices as a result of the war.
“Interest rates as a policy tool can only tackle one at a time,” he said. “Higher import tariffs should result in only a once-off increase in prices, but we cannot be sure.”
“Inflation was already proving sticky in recent months. The Fed will worry that higher goods prices could spill over into higher service inflation and ultimately higher inflation expectations.”
Odendaal said that, over the past two decades, goods inflation in the US has mostly been negative, containing overall inflation levels—but what lies ahead, is difficult to know.
How the South African Reserve Bank is expected to respond
While the US Fed has a challenge ahead navigating the coming storms, Odendaal said other central banks have a more straightforward path.
For counties like Germany, India and Australia, there is little reason to fear higher inflation, he said.
“On the contrary, all the goods previously destined for the US must now find a home somewhere else. This could turn out to be a disinflationary episode, especially considering the sharp oil price declines.”
This could lead central banks to cut rates aggressively. But this isn’t the case for South Africa, which is an emerging market with a volatile currency.
For the SARB, the main concern will be exchange rate stability, and it is likely to hold off on any interest rate cuts until things settle down.
“The South African Reserve Bank is likely to sit on its hands for the next few months, until there is greater clarity over US trade and monetary policies,” Odendaal said.
“The rand at R19 to the dollar could put some upward pressure on domestic inflation, but not much, given that the price of Brent crude has fallen faster than the rand.”
Meanwhile, the weaker currency will offset some of the impact of higher tariffs for local exporters, he said.
Old Mutual Group Chief Economist Johann Els noted that the SARB could find room to begin cutting interest rates from mid-year if inflation remains under control or dips below 3%.
The key, however, is the rand.
Investec chief economist, Annabel Bishop, said that rand stability might not be too far away, especially if South Africa can resolve its local issues—such as the breaks in the Government of National Unity (GNU).
After hitting worst-ever levels of R19.93 to the dollar last week, the rand has already pulled back to under R19/$ amid some calm in the markets and easing tensions in the GNU.
Bishop said the rand should strengthen further to around R18.60/$ and possibly beyond.
