Several business and labour organisations have registered surprise and concern over a Wednesday announcement by the South African Reserve Bank (SARB) that it had raised the repo rate at which the central bank lends to commercial banks to 5.5% from four-decade lows of 5.0% – the first rate rise in nearly six years.

Business Unity South Africa (Busa) said on Thursday that it “regretted” that the SARB had found it necessary to increase interest rates by fifty basis points, even though it appeared that the bank took the decision “reluctantly”.

“Whatever the understandable reasons for the bank's decision, Busa believes that, given the current weakness in the economy and the sluggish economic outlook revealed by the SARB’s own assessments, the rise in interest rates will inevitably reduce growth and net job creation this year.

“It may now be necessary to cut our present forecast of 2.8% growth in 2014 and, possibly, our growth expectations for next year,” it stated.

Busa added that the prospect of rising interest rates, contrary to long-standing consensus forecasts of flat interest rates well into 2014, also came at a time when both business and consumer confidence were low. 

“It is clear from the SARB’s assessment that industrial unrest and strikes are exacting a high cost from the economy and are aggravating the large deficit on the current account of the balance of payments, hence impacting on the exchange rate.

“This again highlights the urgent need to collectively and seriously tackle the structural challenges in the local economy which inhibit improved economic performance,” it noted.

CONSUMER CONCERN

Adding to the debate, the Federation of Unions of South Africa (Fedusa) said it was concerned by the raising of interest rates and the effect this would have on the economy, citing “surprise and disappointment” over the decision.

While Fedusa deputy general secretary Krister Janse van Rensburg acknowledged the inflationary and exchange rate challenges facing the economy, he was concerned by the impact of rate hikes on the consumer.

“Most working people have several loans for essential items, such as houses and motor vehicles. This further increase in cost of living, on top of recent mammoth increases in fuel, energy and food prices, will certainly hit them hard,” he added.

Van Rensburg noted that, on a macroeconomic level, the federation had consistently campaigned for the Monetary Policy Committee (MPC) to have due consideration for matters such as economic growth and unemployment.

INFLATION DETERIORATION

Meanwhile, Investec asserted that the SARB’s decision to raise the repo rate was motivated by a deterioration in its assessment of the inflation outlook, with the bank now expecting consumer price index (CPI) inflation to average 6.3% in 2014 rather than the 5.7% forecast at the November MPC meeting.

“The SARB continues to consider the growth outlook to be precarious, owing to both internal and offshore dynamics, lowering its gross domestic product (GDP) forecast for 2014 from 3% to 2.8%, and from 3.4% to 3.3% in 2015.

“Overall, the tone of the accompanying statement can be considered as hawkish on inflation, as the bank noted that ‘[t]he primary responsibility of the bank is to keep inflation under control and ensure that inflation expectations remain well anchored.’ This suggests that the possibility of further interest rate hikes later this year cannot be completely precluded,” it commented.

FORCED HAND

Grindrod Asset Management head Paul Stewart added that the unexpected rate increase was seemingly driven by the fact that several other emerging market central banks, such as Turkey, had “aggressively” hiked their short-term rates in an attempt to protect plunging currency exchange rates to the dollar, euro and pound.

Stewart believed that this had, to some extent, “forced the hand of the SARB.”

“They had to be seen to be doing something instead of standing by and watching the train wreck. In many of these emerging markets, a significant proportion of their bond debt is issued in dollars and euros, so currency depreciation implies much higher interest costs to the fiscus and the rates hikes are an attempt to stem the capital outflow.

“This is not the case in South Africa, where the bulk of the debt is rand denominated, so perhaps the SARB did have some wriggle room, which they decided not to use,” he averred.

ORTHODOX AND CONSERVATIVE

In contrast, global market research firm Nomura held that, while it was “surprised” that the MPC hiked rates, it stated that, as it was the only organisation calling for a rate hike this year, it was “probably less surprised than everyone else by the move”.

It added that the hike was likely the start of a 200 to 250 basis-point hiking-cycle that would be completed by the middle of 2015.

“In our view, the move [to increase rates] considerably increases the MPC’s credibility, as many thought it would not adhere to its mandate and would be overly political. This move suggests that the MPC is indeed orthodox and conservative,” the firm stated.