The Reserve Bank raised interest rates on Thursday in a controversial bid to keep inflation at bay and protect the rand, despite growing evidence that flagging investment, consumption and confidence all pose risks to the sluggish economy. The decision by the monetary policy committee to raise its repo rate by 25 basis points to 6% was no surprise in financial circles but sparked anger among trade unions and concern among business leaders warning about the impact of even slightly higher debt costs."We are shocked," said Jonas Mosia, industrial policy co-ordinator at trade union federation Cosatu and a member of Nedlac, which brings together organised business, labour and government.mini_story_image_hleft1"We are really surprised, particularly because this comes on the back of increases in income tax, electricity prices and transport costs. The increase in interest rates will put workers and their families further into debt and will further slow economic growth. We strongly condemn this decision."The two-day debate in the MPC preceding the announcement had clearly been heated. Four members voted for a hike - the first since last July - while the other two wanted to keep interest rates steady.When announcing the increase, Reserve Bank governor Lesetja Kganyago acknowledged the argument to keep monetary policy steady but justified the hike due to the risks to inflation posed by an anticipated US rate hike later this year, which is likely to hit the rand.He said although the inflation outlook had deteriorated only slightly since the last policy meeting in May, headline inflation was set for a sustained breach of the 3-6% official target range in the first two quarters of next year, averaging 6.9% in the first three months and 6.1% in the second."The expected inflation trajectory implies that the real repurchase rate remains low and possibly still slightly negative at times, and below its longer-term average. The monetary policy stance therefore remains supportive of the economy," he said.Most analysts welcomed the increase, saying early action had averted the need for more painful rate hikes in the future.Standard Chartered's regional research head for Africa, Razia Khan, said there might be no need for a further rate hike this year if the rand withstood the fallout of a US rate hike."The bank will have earned itself the luxury of adopting a somewhat more neutral stance in the weeks ahead," she said.story_article_right1The MPC pointed out that since the last policy meeting, the rand had fallen 5% against the dollar, 3.6% against the euro and 3.5% against a trade-weighted basket of currencies.It sees the "real effective exchange rate" of the currency remaining relatively stable over the next couple of years as part of the assumptions underlying its inflation forecasts, which it published for the first time to enhance transparency around its decisions."A nominal depreciation in excess of this would pose an upside risk to inflation, although this risk could be ameliorated to some extent should the relatively low pass-through from the exchange rate to inflation persist," Kganyago said.Standard Bank researcher Walter de Wet said the rate hike boosted the Reserve Bank's credibility and could provide an anchor for the rand - which initially firmed after the announcement, before giving up its gains. "We maintain our view that the bank is likely to remain on hold into 2016," he said.Nonetheless, business executives said consumers and companies would be hurt. "It will hit people hard in their pockets, and businesses which have had to buy generators but couldn't afford to pay cash," said Linda Blackbeard, CEO of the Randburg Chamber of Commerce and Industry.The bank revised its growth forecasts slightly down, predicting that the economy would expand 2% this year and 2.1% next year, compared with estimates of 2.1% and 2.2% respectively in May...