Tariff hikes spur hopes of two US interest rate cuts this year

Our weekly podcast by Kevin Lings

US Fed faces rate cut dilemma on tariff-related pressures

In this podcast, STANLIB’s Chief Economist, Kevin Lings, explores some of the outstanding issues in US tariff implementation. He also discusses the early signs of how the effective tariff into the US of 18.6%, against below 3% a year ago, will affect consumer spending, inflation, economic growth and interest rates.

The focus areas during the week included

The S&P 500 index surged by 2.4%, offsetting the prior week’s decline of 2.4%. Year-to-date the S&P 500 is up 8.6% and it has risen by 28% from the low on 8 April 2025. The market was boosted by rising expectations that the US Federal Reserve (Fed) will cut interest rates twice more this year as well as some encouraging stock-specific headlines. Notably, Apple announced that it would invest an additional $100 billion in US-based manufacturing. This adds to a previously-announced plan to invest $500 billion in developing US-based manufacturing over the next four years. SA’s All-Share Index also benefited from improved global investor sentiment, rising by a substantial 3.2% in the week to reach another record high. The All-Share Index is back above 100 000 index points and has risen by a remarkable 19.9% year-to-date, despite all the negative local news flow and the plethora of half-truths.

The rand was one of the best-performing emerging market currencies in the first trading week of August, gaining 2% against the US dollar. By comparison, the Emerging Markets currency index gained a more modest 1.1% in the same period. This occurred despite SA being one of the hardest-hit emerging market economies under President Trump’s latest round of tariff increases. In the year to date, the emerging market currency index has gained 7.4% against the dollar, while the rand is up 6%.

On Thursday, Trump announced that he would nominate Stephen Miran, the current chair of the White House’s Council of Economic Advisers, to fill the remainder of Governor Kugler’s term on the Federal Open Market Committee (FOMC), after her resignation last week (her term was scheduled to end in January 2026). Stephen Miran is one of the architects of Trump’s tariff policy and has argued that that higher tariffs will not be inflationary. The nomination still needs to be confirmed by the Senate, which is in recess until early next month. If Miran is confirmed in time for the 17 September FOMC meeting, it seems likely that he will join fellow Fed board members Waller and Bowman in arguing for an interest rate cut. The reaction from FOMC members to the weaker-than-expected labour report was mixed. Williams, Bostic and Hammack all played down the softness in July, although Federal Reserve Bank of San Francisco President Mary Daly said the central bank “will likely need to adjust policy in the coming months” if the labour market slows any further and inflation remains relatively subdued. The market is currently pricing in an 89% chance of a 25 bps in September, and at least one further rate cut in the remainder of 2025.

The Trump administration’s new round of global tariffs took effect on Thursday, 7 August. However, tariff uncertainty persists. For example, while the Trump administration threatened to impose import tariffs of 100% on semiconductors, Trump said that if companies commit to manufacture in the US they will not have to pay the higher tariff. Apple, Samsung, and TSMC have all pledged to increase investments in the US. The Trump administration has also signalled upcoming tariffs on the pharmaceutical sector, perhaps in the 150% to 250% range. But there appears to be growing optimism that exemptions to the pharma tariffs may also be put in place, similar to the semiconductor tariffs. Trump also said he would double tariffs on Indian goods to 50% as a punishment for the country’s purchase of Russian oil, while negotiations with Switzerland ended without reaching a deal, leaving levies on Swiss imports at 39%. Overall, the average tariff rate in the US has increased from less than 3% in 2024 to around 18.6% currently, which is expected to put upward pressure on goods inflation in the months ahead.

The US Institute for Supply Management (ISM) reported that its services purchasing managers’ index (PMI) declined by 0.7 index points to 50.1 in July, below the consensus estimate for a reading of 51.3. The report’s new orders and employment indexes both declined in July, with employment registering a decline for the second consecutive month. Meanwhile, the prices index rose to 69.9, the highest reading since October 2022.

US initial claims for unemployment insurance were reported at 226 000 for the week ended 2 August, up from the prior week’s revised level of 219 000. The level of jobless claims remains relatively low by historical standards and shows a solid labour market. In contrast, US continuing jobless claims continue to trend higher, rising by 38 000 in the week to 1.97 million, the highest level since November 2021, suggesting it has become more difficult to find a job.

The Bank of England (BoE) cut its key interest rate by 25 bps to 4%, apparently due to concerns about a weakening labour market. The Monetary Policy Committee was split 5 to 4 in favour of the reduction after a second ballot (the first two-round vote since the inaugural meeting in 1998). Governor Andrew Bailey said the decision was “finely balanced” and reiterated that “interest rates are still on a downward path, but any future rate cuts will need to be made gradually and carefully”. The BoE forecast that inflation would accelerate to a two-year high of 4% in September from 3.6% in August, and warned of a greater risk of price increases in the coming years.

Retail sales in the Eurozone increased by 0.3% m/m in June 2025. This was in line with market expectations but well above the May decline of -0.3% m/m. Over the past year retail spending rose 3.1%, suggesting some resilience in the Eurozone economy in Q2 2025. In contrast, German industrial output declined by 1.9% m/m in June 2025, its lowest level since the pandemic in 2020 and worse than market expectations for a decline of 0.5% m/m. Industrial production for May was also revised lower to reflect a fall of 0.1% m/m rather than the initially-reported increase of 1.2% m/m. As a result, German production contracted 1% q/q in Q2 2025, probably reflecting a sluggish export performance.

In July 2025, China’s trade balance recorded a reduced surplus of $98.24 billion, well below market expectations for a surplus of $104.70 billion. This follows a trade balance of +$114.75 billion in June. The deceleration in China’s trade surplus in July was a result of imports surging during the month while exports fell. The increase in imports was probably driven by tech-related products and some commodities. China’s exports have been hurt by ongoing weakness in shipments to the US, but this has been largely offset by China’s success in increasing exports to other parts of the world.

The S&P China services purchasing managers index rose to 52.6 in July from June’s 50.6 reading, the strongest growth in 14 months. While summer is the peak season for services such as tourism, transportation and entertainment, last month’s expansion suggested some resilience in China’s services sector, which has been hit by sluggish consumer demand amid a prolonged housing downturn.

The Summary of Opinions at the Bank of Japan’s (BoJ) July monetary policy meeting showed that board members debated the timing and pace of future interest rate hikes. One board member suggested that at least two to three months were needed to assess tariff effects and that if the US were able to withstand the effects better than expected, (which would be beneficial for Japan), then it could be possible for the BoJ to exit from its wait-and-see monetary policy stance as early as the end of this year. Another board member was more cautious, emphasising that the central bank’s baseline scenario remained one of moderating economic growth and sluggish underlying inflation, necessitating continued monetary accommodation. Japan’s real (inflation-adjusted) wages fell by 1.3% y/y in June, following a 2.6% y/y decline in May, as inflation continued to outpace pay increases.

The Reserve Bank of India (RBI) held its scheduled monetary policy meeting and decided to keep its key interest rate, the policy repo rate, at 5.5%. The decision, which was generally expected, was unanimous. According to the post-meeting statement, policymakers argued that the global environment remained “challenging”. Although domestic growth is “resilient,” growth in the industrial sector “remained subdued and uneven across segments.” In terms of inflation, which has fallen for eight consecutive months, helped by a sharp decline in food inflation, the RBI acknowledged that the inflation outlook for 2025–2026 has become “more benign than expected”. However, it lifted the longer-term inflation projection to 4.9%, which is above the midpoint of the central bank’s 2% to 6% inflation target range. The RBI has maintained a “neutral” interest rate since February 2025 and appears to have reached the end of a rate-cutting cycle.