The South African Reserve Bank (SARB) has issued a warning that borrowing costs globally are likely to remain elevated for a longer period than previously anticipated. This caution comes as the Bank expresses growing concern about the inflation outlook, influenced heavily by heightened global tensions following the return of US President Donald Trump and the implementation of aggressive trade tariffs.
Key Takeaways
- Global Borrowing Costs Expected to Remain High: The South African Reserve Bank warns that borrowing costs are likely to stay elevated for longer due to escalating global trade tensions and growing economic uncertainty.
- Rising Inflation and Political Strains Threaten Stability: Domestic inflation risks are increasing, fuelled by geopolitical instability, internal political disagreements, and upcoming VAT hikes that could intensify cost-of-living pressures.
- Monetary Policy Remains Cautious Despite Previous Rate Cuts: Although the SARB has cut rates by a cumulative 75 basis points since late 2024, it has held rates steady recently, signalling a cautious approach amid persistent global and domestic risks.
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In its semi-annual Monetary Policy Review, published on Tuesday in Johannesburg, the Reserve Bank noted that confidence regarding the medium-term economic outlook has declined substantially. This deterioration is largely attributed to intensified global trade disputes and persisting domestic uncertainties, both of which have dampened expectations for economic stability. The Review paints a stark picture of a world economy grappling with structural challenges, magnified by protectionist policies and volatile political climates.
Global Risks Point to Higher Policy Rates for Longer
While it was initially expected that major economies would continue to lower their policy rates, the emergence of new risks suggests that interest rates will likely remain higher for an extended period. The SARB highlighted that the global environment has shifted considerably, and with it, the trajectory of interest rate expectations.
This change could see consumers and businesses facing higher credit costs for longer, limiting investment appetite and squeezing already fragile household budgets.
Impact of Trump’s Tariff Policies
Since re-entering the White House in January, President Trump has adopted a particularly aggressive stance on trade, imposing reciprocal tariffs on trading partners. Although there was a temporary reprieve with a 90-day postponement for most countries, a 10% levy remains in place. These measures have significantly altered global trade dynamics and contributed to the deterioration in confidence. Trump’s renewed tariff war is not only inflaming tensions with key US allies but also triggering ripple effects across global supply chains, with developing economies like South Africa increasingly caught in the crossfire.
The optimism that characterised economic forecasts in October has now largely dissipated, according to the SARB. The Governor of the Reserve Bank observed that the sense of certainty which previously underpinned global economic projections has given way to heightened levels of uncertainty, both internationally and within South Africa’s borders. Investor sentiment has weakened considerably, with capital outflows from emerging markets intensifying and currencies coming under renewed pressure.
For an even deeper dive into upcoming monetary shifts, check out our full Predictions for South Africa’s Interest Rates in May and see why economists are keeping a close eye on the SARB’s next move.
Rising Risks to Inflation and Economic Growth
Although inflation and inflation expectations within South Africa have shown signs of improvement—prompting previous reductions in borrowing costs—risks to both inflation and economic growth have increased substantially since the beginning of the year. The SARB has acknowledged that while lower interest rates are supporting economic activity, the risk environment has worsened considerably. Rising fuel prices, volatile food costs, and a fragile political environment threaten to undo much of the hard-won progress made on stabilising inflation over the past year.
Interest Rates Held Steady Amid Mounting Uncertainties
Last month, the SARB decided to keep its benchmark interest rate unchanged at 7.5%, following three consecutive reductions of 25 basis points each. This decision was taken amid extreme levels of uncertainty, with escalating global trade tensions being a key contributing factor. Analysts note that the decision reflects a cautious balancing act between supporting growth and guarding against inflation shocks that could derail economic recovery efforts.
Cumulative Rate Cuts Provide Limited Relief
Since September 2024, the SARB has lowered interest rates by a total of 75 basis points, which has slightly eased the monetary policy stance. However, in its statement on X, the central bank emphasised that given the elevated risks to the inflation outlook over the medium term, the current monetary policy stance remains appropriate and necessary. Despite these cuts, real borrowing costs remain high for many South African households and businesses, blunting the effectiveness of monetary easing.
Global Disinflation Risks Reversing
For the first time in several years, the risk that global disinflation could stall—or even reverse—has increased sharply. This development has caused a notable upward shift in market expectations for short-term interest rates, reflecting a less favourable global economic backdrop. This reversal in expectations marks a worrying turn for global monetary policymakers, who may now find themselves constrained in responding to fresh shocks or downturns.
Domestic Inflation Outlook Clouded by New Risks
Although inflation in South Africa remains relatively contained and is forecast to align closely with the 4.5% midpoint of the SARB’s target range, the level of uncertainty surrounding this outlook has grown significantly since the start of the year. Heightened geopolitical tensions, continued global trade disputes, and domestic political friction—particularly within the country’s governing coalition—are all contributing factors. The erosion of political cohesion within the ruling coalition is viewed by many observers as a potential flashpoint that could further destabilise the economic policy environment.
High interest rates don’t just make borrowing expensive — they ripple through the economy, affecting everything from home loans to business expansions. Understand the Impact of Interest Rates on Loans and how they can change your financial strategies.
VAT Increases Likely to Add Pressure to Inflation
The Reserve Bank has flagged the potential inflationary impact of planned increases in value-added tax (VAT). It estimates that the proposed 0.5 percentage point VAT hike, scheduled for May 1, along with a further 0.5 percentage point increase next year, could add approximately 0.2 percentage points annually to headline inflation, further complicating the economic outlook. Higher VAT will disproportionately impact lower-income households, intensifying cost-of-living pressures and potentially dampening consumer spending at a time when domestic demand needs support.
Conclusion
The South African Reserve Bank’s latest review paints a sombre picture of both global and domestic economic prospects. With heightened uncertainty driven by renewed trade wars, fragile political alliances, and looming tax increases, the environment for growth remains precarious. While inflation is currently contained, risks are mounting on multiple fronts, prompting the SARB to adopt a vigilant and measured monetary policy stance. Households, businesses, and investors should prepare for a more volatile period ahead, where financial resilience and cautious planning will be increasingly vital.
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