The criticism came from the South African Chamber of Commerce and Industry, which questioned the rationale behind the Reserve Bank’s decision to raise borrowing costs at a time when growth remains subdued and external pressures—particularly energy shocks linked to the conflict in Iran—are already weighing on households and firms.
“The hike in the policy rate last month can barely be justified given the overall performance of the economy,” the chamber said in a statement on Thursday.
First rate hike in three years aimed at inflation risks
The South African Reserve Bank raised its benchmark interest rate by 25 basis points to 7% on May 28, marking its first increase in three years. Policymakers said the move was intended to anchor inflation expectations as geopolitical tensions in the Persian Gulf pushed up global energy and food costs.
Alongside the decision, officials lifted their inflation outlook, now expecting price growth to average 4.9% by the third quarter—up from a prior forecast of 3.3%.
Governor Lesetja Kganyago defended the move, saying it was aimed at steering inflation back toward the bank’s 3% target. He stressed that future decisions remain uncertain. “I cannot tell you now if more will be needed, or how much. We take our decisions meeting by meeting.”
“No evidence of demand-driven inflation,” says business group
The chamber argued that the inflation pressure currently seen in the economy is largely imported and temporary, rather than rooted in domestic demand.
“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,” it said.
It added: “There is no evidence of demand-pull inflation that led to the acceleration in inflation.”
That assessment directly contrasts with views from economists tracking the region.
Yvonne Mhango said the tightening move was widely expected. “The hike was no surprise,” she noted, adding that higher oil prices had already begun feeding into broader inflation pressures beyond fuel.
Weak growth backdrop deepens policy tension
South Africa’s economy has struggled for years, expanding by less than 1% annually on average over more than a decade. That weak trajectory has left policymakers balancing inflation control against growth support—often with limited room for compromise.
Recent indicators suggest sentiment is still fragile. A business confidence gauge rose marginally to 124.1 in May, up from 123.6 in April, but remains below January’s level of 131.4.
The chamber noted that improvements in vehicle sales and export volumes offered some support, while import activity provided a smaller boost. However, it warned that weakening tourism and rising inflation are still dragging sentiment lower.
“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.
Oil shock at the center of the debate
At the heart of the disagreement is whether the current inflation spike is temporary or persistent.
The central bank has pointed to rising global oil prices—linked to geopolitical tensions in the Persian Gulf—as a risk that could spread through transport, food, and broader price channels. That concern underpins its pre-emptive tightening stance.
Business groups, however, argue that reacting to a potentially short-lived supply shock risks unnecessarily choking already weak domestic demand.
The Reserve Bank’s own projection model suggests at least one more 25-basis-point increase could still be on the table this year, though officials have emphasized that the model is only a guide rather than a commitment.
A familiar policy dilemma with higher stakes
The debate highlights a recurring challenge for South African policymakers: how to respond to imported inflation in an economy that is not overheating.
For now, the divide remains clear. The central bank sees a risk-management case for caution, while business leaders argue the economy cannot afford tighter financial conditions in the absence of strong domestic price pressures.
Between those positions sits an economy still struggling to break out of its long-running low-growth cycle—now further tested by global instability and rising living costs.