Following US President Donald Trump’s imposition of additional tariffs on South African exports to that country as part of a broader move to nationalise trade, South Africa is likely to see inflationary relief.
However, this does not necessarily translate into lower interest rates.
Investec chief economist, Annabel Bishop, said that the total 30% tariffs that are now being imposed on South African exports to the US could result in local inflation dropping given that this will weaken demand for exports, resulting in less production and, as a result, weakening demand-led inflation.
Old Mutual chief economist, Johann Els, said that the US is likely to feel inflation with no upward pressure on the cost of living locally, unless South Africa retaliates and raises tariffs on US imports into South Africa, which is highly unlikely.
Global trade war and US recession fears continue to dominate market moves, creating huge uncertainty and volatility, said Andre Cilliers, Currency Strategist at TreasuryONE.
The rand has seen a knee-jerk reaction to worries over the Government of National Unity’s stability following recent disagreements over the National Budget, other factors are key to the inflation outlook, including global commodities’ prices, particularly for food, petroleum products and oil, said Bishop.
The local currency has weakened from R18.43 as of March 31 to break the key R19 mark to the greenback as of today.
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Els expects the rand to gain strength as the dollar could weaken should the US Federal Reserve cut interest rates. He has revised his outlook on the probability of a recession in the State on the back of trade tariffs.
In addition, said Els, in a scenario in which the rand gains strength and the oil price continues to weaken, the local fuel price will benefit. He pointed out that oil was now below $70 a barrel compared with $74 earlier this week.
Cilliers noted that brent crude has lost over 6% over the last two days on the back of the expected impact of tariffs on demand. OPEC+ has agreed to implement output increases, further dampening oil's outlook.
While Els sees scope for the South African Reserve Bank to cut interest rates from the middle of the year, Bishop argues that doing so would weaken the rand.
Should interest rates decline to the point where the differential between the quantum of cuts in the US and South Africa is too narrow, this will place additional pressure on the rand, weakening it further, which affects import costs, Bishop explained.
The negative side, however, is that economic growth will weaken, said Bishop. She noted that Investec had already weakened South Africa’s economic growth outlook to 1.3% for this year from the 1.8% it anticipated at the start of the year.
Bishop noted that the drop in Investec’s outlook, which considered the tariffs before they were implemented, also considered the growth constraint of the “ongoing freight crisis”.
The Bloomberg consensus for growth has fallen to 1.5% from 1.7%. Prior to the implementation of tariffs, the South African Reserve Bank anticipated gross domestic growth of 1.9% compared with the 0.6% seen last year.
IOL