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Trump Tariffs Threaten Inflation Stability, Warns South Africa’s Kganyago
South African Reserve Bank (SARB) Governor Lesetja Kganyago has cautioned that US protectionist trade policies under President Donald Trump could fuel inflation and jeopardize future interest rate reductions.
Speaking at the World Economic Forum in Davos, Kganyago expressed concerns about the potential ripple effects of Trump’s proposed 25% tariffs on Mexico and Canada. These measures, he said, could have far-reaching implications for global monetary policy.
“To the extent that the measures taken are inflationary, it could slow down the disinflation process that central banks have worked on since the great inflation of 2022,” Kganyago told Bloomberg TV.
Potential Impact on South Africa and Emerging Markets
While central banks in the US, European Union, and South Africa have been reducing interest rates in response to easing inflation, Trump’s tariffs could disrupt this trend.
The SARB has been proactively cutting rates, lowering the benchmark interest rate by 25 basis points in November 2024 to 7.75%. Economists anticipate another rate cut in January.
However, South Africa’s inflation outlook faces significant risks:
- Higher Energy Prices: Domestic energy costs continue to climb.
- Weaker Rand: The rand, often seen as a barometer for emerging markets, has depreciated nearly 7% against the dollar since Trump’s election victory in November.
The depreciation is attributed to a global retreat from emerging markets, driven by heightened tariff threats and diminished expectations for US Federal Reserve rate cuts.
Balancing Risks and Opportunities
Despite the challenges, Kganyago noted potential mitigating factors. Improved crop outputs due to favorable weather could lower food costs, helping ease inflationary pressures in South Africa.
“We have got to continuously assess the balance of risks and calibrate policy accordingly,” he said.
Annual inflation data due Wednesday is expected to show an increase to 3.2% in December, up from 2.9% in November. Policymakers project inflation to average 4.5% for 2024, aligning with SARB’s target range.
Global Implications of Trump’s Policies
The uncertainty surrounding US trade policies poses challenges for global monetary policy coordination. A prolonged period of elevated inflation could halt the easing of restrictive monetary policies, a process central banks have carefully managed since the economic disruptions of 2022.
Kganyago’s warnings underscore the interconnectedness of global economies and the need for vigilant policy responses to evolving risks.
As South Africa navigates these complexities, the focus remains on achieving a delicate balance between fostering economic growth and maintaining inflation stability.
What do you think about the impact of protectionist trade policies on emerging markets?
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