Global Trade Fears Keep South Africa's Interest Rates On Hold

Source: Lesetja Kganyago - Facebook.

This decision comes amid uncertainties surrounding global trade and national budget issues.

"Given the uncertain global situation, the MPC spent time during this meeting exploring different external scenarios. For one, we considered a slowdown in the United States, with a weaker dollar and higher commodity prices, especially for gold. This implied some modest benefits for the South African economy, given better terms of trade and a stronger rand. Both inflation and the policy rate were therefore a little lower, relative to the baseline forecast," said the South African Reserve Bank governor, Lesetja Kganyago.

"We also explored scenarios built around changes in South Africa’s access to US markets. If South Africa were to lose AGOA benefits, we see some weakening of exports and slightly lower growth. If that were compounded with tariffs on South African exports, the effects would be larger.

"The most severe scenario we considered added a sentiment shock, with a weaker rand, higher domestic inflation and therefore a tighter policy stance. In this case, growth would be lower by 0.7 percentage points, with the exchange rate depreciation offsetting some of the tariff effects on exports."

Economists had mixed expectations leading up to the announcement, with many market watchers having expected a potential 25 basis point rate cut amid stabilised domestic inflation and a stable rand. Key domestic data bolstered the case for a rate cut, as recent CPI figures revealed subdued price pressures, with rental and owner’s equivalent rent inflation remaining below forecasts. Furthermore, lower-than-expected electricity price increases and a forecast petrol price cut had further improved inflation dynamics.

Market uncertainty grows

In a difficult global environment, Kganyago said it is vital to sustain domestic reforms that boost growth, while preserving macroeconomic stability. Hoewver, Landsdowne Property Group says the South African Reserve Bank’s hawkish stance on interest rates, rising living costs and the upcoming VAT hike could put the brakes on positive momentum in the residential property market.

Jonathan Kohler, founder and chief executive officer of Landsdowne commented: “In an environment of rising living costs, affordability remains a major factor. The MPC’s decision to hold interest rates and concerns over economic growth will likely impact investor sentiment in the short term, as buyers adopt a wait-and-see approach."

Kohler added that potential buyers in certain market segments may opt to continue to rent, due to the added certainty provided by a fixed-cost lease.

"Upcoming changes to transfer duties could, however, stimulate buying activity in the more affordable segments of the property market. While transfer duties have risen by about 10%, those purchasing properties valued up to R1.210m will be exempt from paying transfer duty, starting from 1 April 2025. This marks an increase from the previous threshold of R1.1 m.

“This adjustment marks a significant and welcome shift for the property market, especially in the secondary sector. By boosting affordability in the lower- to middle-income brackets, we foresee heightened interest from first-time buyers and upward momentum across various property segments. This move has the potential to drive market activity and benefit both buyers and sellers.

“Additionally, while the higher-end property market faces increased transfer duties, the impact is expected to be minimal, as buyers in this segment typically have greater financial flexibility and are unlikely to be deterred by the adjustment,” added Kohler.

Despite concerns over economic growth, investor confidence remains buoyant, with the Absa Homeowner Sentiment Index for the fourth quarter of 2024 showing that 85% of investors are optimistic about expanding their portfolios - the highest level of investor confidence since 2016.

“Savvy investors will want to lock in value now. Gauteng in particular offers exceptional value for money, as house prices have remained stagnant for almost a decade,” he said.

The 2025Q1 GDP projection is 0.4% (q/q, seasonally adjusted), while 2025Q2 is 0.5%. Growth for the current calendar year has been marked down slightly, from 1.8% to 1.7%.

The MPC is expected to resume its rate-cutting cycle in May, potentially reducing the repo rate to 7.25% and maintaining it at that level for the remainder of the year.