After reaching an inflection point in the interest rate cycle, expectations for a more aggressive cutting cycle from reserve banks around the world have moderated due to shifting global dynamics.
After the US Federal Reserve's (Fed) bumper 50 basis point rate cut – the first in four years – lowered the policy rate to 5.00%, markets hoped for additional aggressive cuts to support economic growth and employment.
While inflation remains near the Fed's 2% target, a slowdown in job growth and overall economic activity, and the mounting financial costs from the hurricanes that impacted the south have forced the Fed to recalibrate its approach.
Speaking during the Association of Corporate Treasurers SA (ACTSA) Conference, which focused on supporting an effective treasury function in ensuring digitalisation, capital clarity and cash visibility, Neo Ralefeta, Treasury Structuring Consultant at Investec, unpacked the numerous factors that could impact inflation and constrain the pace and scale of interest rate cuts into 2025.
Dollar funding and inflation
Presenting his insights and views on the trends affecting dollar funding, Ralefeta highlighted the major growth constraints in South Africa and the United States, and the factors driving inflationary pressure globally.
From a US perspective, concerns are rising over a second wave of inflation. In this regard, Ralefeta outlined the potential impact the 5 November elections could have on the U.S. and global economies.
“While the Democrat and Republican candidates have divergent policies, both pose inflationary risks.”
With markets positioning for a Republican win, the Trump Trade is playing out in markets based on the outcome of the 2016 vote.
“While a Trump re-election is likely positive for risk assets, the US dollar and economic growth, it will add inflationary pressures due to higher debt, market fragmentation, and a re-escalation in the US-China Trade War,” elaborated Ralefeta.
A stronger US dollar will exert inflationary pressure on global markets, with implications for South Africa, especially as the South African Reserve Bank (SARB) considers the global interest rate environment in its inflation forecasting.
Ralefeta also highlighted additional global factors impacting the global inflationary outlook, such as the impact of climate change, including the rising incidence of adverse weather events and the impact these have on jobs.
“The influence of technology-led disruption and innovation is another major factor, with AI-driven misinformation and disinformation and cyber attacks major risks,” he explained.
The combined effect of these factors increases risk sentiment, which has a strong influence on monetary policy as they typically rise in unison, affecting the interest rate trajectory.
While a Trump re-election is likely positive for risk assets, the US dollar and economic growth, it will add inflationary pressures due to higher debt, market fragmentation, and a re-escalation in the US-China Trade War.
South Africa's challenges
In addition to these global influences, South Africa continues to grapple with domestic risks that impact the country's inflationary outlook.
“Key structural issues relate to energy and water supply constraints, state fragility, unemployment and weak economic growth,” continued Ralefeta.
However, the South African economy is benefitting from multiple supportive factors. The SARB's more cautious rate-cutting approach has widened the interest rate differential with the U.S., supporting fund flows into South Africa's higher interest rate environment.
The resultant strengthening of the rand helped lower inflation within the Reserve Bank's target range, which should support another rate cut at the 21 November Monetary Policy Committee (MPC) meeting.
“Food deflation and the strong commodities rally are additional factors supporting economic growth and a lower inflation outlook for South Africa,” added Ralefeta.
“However, continued momentum will hinge on the newly formed South African government’s ability to deliver on its reform agenda to reduce the structural risk factors in South Africa.”
In addition, Ralefeta highlighted the need to draw from the successes achieved in the Eskom turnaround to help other state-owned enterprises like Transnet.
“Improved efficiencies at Transnet are critical to the country's ability to exploit higher commodity prices in the coming months by exporting higher volumes.”
Removal from the Financial Action Task Force (FATF) grey list was another critical factor in reducing the country's risk premium, according to Ralefeta, with the G-20 Summit taking place in Johannesburg in December 2025 serving as an important platform to sell the SA Inc value proposition.
“The government has an entire year to market South Africa to the world as an attractive investment destination, but these myriad factors must align,” commented Ralefeta.
“While there are numerous global factors that are out of our control, South Africa's ability to emerge as an outlier in terms of economic growth in the global context is squarely in our hands given the numerous factors in the local market that can support economic growth and prosperity,” he concluded.
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