Introduction:

Ongoing legal challenges to President Trump’s tariffs in the U.S., including conflicting court decisions, which have created significant market uncertainty. Simultaneously, the South African Reserve Bank’s recent decision to cut its benchmark interest rate as part of an effort to revive a sluggish economy amidst low inflation. Active debate in South Africa about lowering and narrowing the country’s inflation target to potentially enable lower interest rates in the long term and align with international standards.

Key takeaways from sources:

Legal Challenges to U.S. Tariffs Create Significant Uncertainty: President Trump’s broad tariffs, particularly those based on the International Emergency Economic Powers Act (IEEPA), face ongoing legal challenges. The U.S. Court of International Trade ruled that President Trump exceeded his authority by using the IEEPA for these tariffs, stating that the power to levy tariffs belongs to Congress, not the President. This ruling ordered an immediate block on the tariffs. However, the U.S. Court of Appeals for the Federal Circuit temporarily reinstated the most sweeping tariffs, pausing the lower court’s ruling while they consider the government’s appeal. A separate federal court also found Trump overstepped his authority using the IEEPA for reciprocal and fentanyl-related tariffs, though that ruling was narrower. President Trump has strongly criticized the trade court’s decision and hopes the Supreme Court will overturn it. The legal battles have created significant uncertainty in financial markets, contributing to a softening U.S. dollar and making investors cautious, with the dollar index heading for its fifth consecutive monthly decline. This uncertainty is impacting businesses, causing concerns about supply chains and business survival.
South African Reserve Bank Cuts Interest Rate to Stimulate Sluggish Economy: The South African Reserve Bank (SARB) cut its benchmark repo rate by 25 basis points to 7.25% on May 30, 2025. This decision was largely anticipated and aimed at reviving a sluggish economy and boosting consumer confidence. Governor Lesetja Kganyago cited revised-down inflation forecasts as a primary reason for the cut, noting April inflation was below the 3-6% target range and core inflation was at the bottom of the range. Other factors included a stronger exchange rate assumption and lower world oil prices. The SARB also trimmed its GDP growth projections for 2025 from 1.7% to 1.2%, acknowledging disappointing indicators and rising unemployment. The rate cut was not unanimous among the Monetary Policy Committee (MPC), with one member preferring a larger, 50-basis-point cut. As a conventional reaction, the South African Rand weakened against the U.S. Dollar following the rate cut, as lower interest rates reduce the currency’s attractiveness to foreign investors.
Active Debate on Lowering South Africa’s Inflation Target: There is an ongoing debate and official talks between the SARB and the National Treasury about lowering and narrowing South Africa’s inflation target. The current target range is 3% to 6%, with a 4.5% midpoint being the ideal. SARB Governor Lesetja Kganyago is a strong proponent of adopting a lower and more narrow target, ideally 3%. Proponents argue that a 3% target would align with international standards, benefit fiscal policy, reduce sovereign risk and debt service costs, and potentially lead to lower interest rates in the long term. There is broad consensus between the SARB and National Treasury that the current range is too wide. Technical teams discussing a new framework are expected to provide recommendations soon. The SARB’s modeling suggests a 3% inflation objective could lead to the policy rate falling to just under 6%, compared to staying above 7% in the current baseline scenario. While growth might be slower initially under a lower target due to higher real rates, the economy is expected to perform better later as rates ease. The MPC views the 3% scenario as “more attractive” than the 4.5% baseline and aims to see inflation expectations move lower.

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Sources referenced:

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