The outcome of the 2024 US presidential election has the potential to send ripples across the global economy, including influencing South Africa’s interest rates in 2025. A second term for the incumbent could lead to several scenarios that impact the South African Reserve Bank’s (SARB) monetary policy decisions.
How the re-election could affect SA’s interest rates
1. Increased US Fiscal Spending and Potential Inflation
A second term may see a continuation or even expansion of the current administration’s fiscal policies, including large infrastructure projects and potential tax cuts. This could lead to increased government spending in the US, potentially fueling inflation.
- Impact on Interest Rates: If US inflation rises, the Federal Reserve (the US central bank) is likely to respond by raising interest rates to cool down the economy. This could put upward pressure on South African interest rates as well. Higher interest rates in the US tend to attract foreign investment, which can lead to capital outflow from emerging markets like South Africa. To counter this and maintain investor confidence, the SARB may need to raise its own interest rates.
2. Trade Policy Uncertainty and Volatility
The current administration’s approach to trade has been characterized by a degree of unpredictability, with tariff impositions and renegotiation of trade deals. This trend could continue in a second term.
- Impact: Continued trade policy uncertainty can create volatility in global markets, including currency markets. This volatility can make it more expensive for South Africa to borrow money internationally and can also impact inflation. The SARB might need to adjust interest rates to manage these challenges and maintain stability.
3. Global Economic Growth and Risk Appetite
Depending on the specific policies pursued, a second term could have varying impacts on global economic growth and investor risk appetite.
- Impact: If policies stimulate US economic growth, this could have a positive spillover effect on South Africa, potentially leading to increased investment and economic activity. In such a scenario, the SARB might have more room to keep interest rates lower to support growth. However, if policies lead to increased global uncertainty or a slowdown in growth, the SARB might need to raise interest rates to protect the economy.
4. The US Dollar and Emerging Market Currencies
The value of the US dollar is closely watched by emerging markets. Policy decisions in a second term could impact the strength of the dollar.
- Impact: A stronger US dollar can put downward pressure on emerging market currencies, including the South African Rand. This can lead to imported inflation as the cost of imported goods increases. The SARB might need to raise interest rates to counteract this inflationary pressure and stabilize the currency.
Conclusion
While the SARB considers a range of domestic factors when setting interest rates, international developments, particularly in major economies like the US, play a significant role. A second term for the current US president has the potential to influence South Africa’s economic outlook and, consequently, its interest rate trajectory in 2025. The specific impact will depend on the policies pursued and their broader effect on global economic conditions.
