As was expected, the Monetary Policy Committee (MPC) raised interest rates by 25 basis points on 28 May.

Prof. Raymond Parsons, economist from the North-West University (NWU) Business School, says the 4 to 2 vote was a preventative step against future inflation in the economy.

“The MPC judged its majority decision to be a precautionary measure, although conceding there is as yet no clear data that second-round effects, such as higher inflationary expectations, are already strongly evident as a result of the global energy crisis and higher fuel prices.”

He explains that the MPC majority view therefore seems to have already conflated the visible first-round inflation effects with possible second-round ones later in order to justify its immediate decision.

“Borrowing costs for business and consumers will nonetheless rise in what is already a weak growth environment, with South Africa’s gross domestic product growth projections being generally cut, including by the MPC.”

According to Prof. Parsons, the minority MPC view believing that the timing was not yet right for a rise in rates is convincing, and that credible reasons exist for such a stance.

“South Africa has economic buffers and some policy space to allow time for monetary policy to still navigate what remains a highly uncertain economic outlook.”

He says it would still have been possible for the MPC statement to convey a hawkish message to business and consumers about likely higher-for-longer interest rate prospects, but combined with another pause in rates for now.

“This would have made the MPC majority view appear less of an outlier compared to most other central banks who, like the South African Reserve Bank, enjoy high credibility, and have overwhelmingly decided to wait and see.”

He says the MPC statement itself referred to the extent to which the bulk of central banks have so far kept rates on hold, given the dilemmas faced by them in highly uncertain economic circumstances.