Reserve Bank interest rate hikes under fire

South Africa’s main industry body questioned the Reserve Bank’s decision to raise interest rates at a time of weak economic growth and fragile business sentiment amid the war in Iran.

The hike in the policy rate last month “can barely be justified given the overall performance” of the economy, the South African Chamber of Commerce and Industry said in a statement on Thursday. 

Monetary policymakers raised the benchmark rate by 25 basis points to 7% on May 28 — the first hike in three years — to anchor inflation expectations as the conflict in the Persian Gulf drives up energy and food prices.

They also lifted their inflation forecast and now see price growth averaging 4.9% by the third quarter, up from 3.3% previously.

“One could speculate that it may not have been necessary to increase interest rates given that the rise in fuel prices may be temporary and of short duration,” the chamber said.

“There is no evidence of demand-pull inflation that led to the acceleration in inflation.” 

Its view is in contrast to that of economists. “The hike was no surprise,” Yvonne Mhango, Bloomberg’s Africa economist, said last week.

“Higher oil prices forced policymakers to act preemptively as signs emerged that the oil shock was spreading beyond fuel prices.”

South Africa’s economy has expanded by an average of less than 1% annually for more than a decade. A gauge measuring business confidence stood at 124.1 in May, up slightly from 123.6 in April but below 131.4 at the start of the year. 

The Reserve Bank’s Quarterly Projection Model points to at least one more quarter-point rate increase this year. Governor Lesetja Kganyago has previously said the model is only a guide. 

Last week, he added that the May rate hike was aimed at returning inflation to the bank’s 3% target. “I cannot tell you now if more will be needed, or how much. We take our decisions meeting by meeting.”

The most notable positive impact on the business confidence index in May was from new vehicle sales, merchandise export volumes and to a lesser extent by merchandise import volumes, Sacci said.

“A substantial negative impact on the BCI was made by the decline in overseas tourists while higher inflation’s negative contribution is also of concern,” it said.