South Africa’s leading business organisation has criticised the South African Reserve Bank’s recent decision to raise interest rates, arguing that the move comes at a time when economic growth remains weak and business confidence is under pressure.
In a statement issued on Thursday, the South African Chamber of Commerce and Industry (Sacci) said the central bank’s decision to increase the repo rate by 25 basis points to 7% on 28 May was difficult to justify given the current state of the economy.
The rate increase, the first in three years, was implemented as policymakers sought to contain inflation expectations amid rising energy and food costs linked to the conflict in the Middle East. The Reserve Bank also revised its inflation outlook upward, forecasting average inflation of 4.9% by the third quarter, compared with a previous estimate of 3.3%.
Sacci argued that the increase in fuel prices may prove temporary and therefore may not warrant tighter monetary policy.
"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 organisation said.
The chamber further noted that there is little evidence of demand-driven inflation within the domestic economy, suggesting that higher borrowing costs could place additional strain on businesses and consumers without addressing the root causes of rising prices.
Economists, however, have largely supported the Reserve Bank’s decision. They argue that policymakers acted proactively to prevent higher oil prices from feeding into broader inflation across the economy.
South Africa’s economy has struggled to gain momentum, recording average annual growth of less than 1% over the past decade. Business confidence remains subdued, with Sacci’s Business Confidence Index rising only marginally to 124.1 in May from 123.6 in April, while remaining below the 131.4 recorded at the beginning of the year.
The Reserve Bank’s Quarterly Projection Model currently indicates that at least one additional 25-basis-point interest rate increase could be implemented before the end of the year. However, Reserve Bank Governor Lesetja Kganyago has previously emphasised that the model serves only as a guide and does not determine policy decisions.
Speaking last week, Kganyago said the May rate hike was intended to steer inflation back towards the central bank’s 3% target.
“I cannot tell you now if more will be needed, or how much. We take our decisions meeting by meeting,” he said.
According to Sacci, the strongest contributors to business confidence in May were increased new vehicle sales, stronger merchandise export volumes and, to a lesser extent, higher import volumes.
However, the organisation warned that declining numbers of international tourists and the negative impact of higher inflation continue to weigh on business sentiment.