Interest rate up as inflation bites

Weak economic growth did not deter Reserve Bank governor Gill Marcus from announcing an increase of 0.25 percentage points in the interest rate yesterday.

South Africa will avoid a recession, but growth will be lower than previously forecast, Marcus said.

"Growth in the second quarter will be positive but subdued," she said.

The bank expects 1.7% economic growth this year.

Six of the seven monetary policy committee members wanted the tightening and one felt rates should be unchanged.

The jump to 5.75% (and prime to 9.25%) was because the committee was "increasingly concerned about the inflation outlook," she said.

Sharp increases in the prices of food and non-alcoholic beverages were reported in May, rising more than 9% year on year .

The bank expects inflation to average 6.3% this year, up from the 6.2% forecast earlier. It aims to keep inflation in a band of 3% to 6%.

"Inflation is expected to return to within the target band by the second quarter of 2015," Marcus said.

Pam Golding Property CEO Andrew Golding said the hike was not unexpected.

It was "unfortunate news for homeowners as well as the growing contingent of aspirant first-time buyers, and will ultimately be most felt by those who are already feeling the pressure of rising utilities costs and erosion in real household disposable income," he said.

Marcus cautioned yesterday that "monetary policy should not be seen as the growth engine of the economy".

She was also worried that wage demands by trade unions will give inflation more legs.

"The MPC is concerned that the recent wage settlements in the mining sector and current demands in the metals sector could set a precedent for wage demands more generally.

"Unless accompanied by higher productivity, such settlements could generate a wage price spiral, and are also like to have a negative impact on employment trends," she said.

Old Mutual Wealth economist Dave Mohr said that the rate hike was made to emphasise that South Africa was in a "tightening cycle" - meaning interest rates will rise further. And to show "that the MPC is serious when confronted with a weak economy or inflation risks for the next 18 to 24 months - the inflation risks are more important".