The Reserve Bank risked greater damage to the economy had it not hiked interest rates. Even so, the central bank is expected to maintain a shallow and brief hiking cycle, economists said this week.
The 25-basis-point hike in the repo rate to 6.75% announced on Thursday was widely expected, although economists were as divided as the Bank's monetary policy committee (MPC), which voted three in favour of the hike and three against.
Bank governor, Lesetja Kganyago, said the final decision followed "robust debate".
Elize Kruger, senior economist at NKC African Economics, said the rate hike may be a one-off event and that interest rates may remain unchanged at this level for some time. Kruger said the Bank's decision was considered a "risk management or buying insurance" approach against inflationary pressures.
NKC's outlook for average headline inflation was 5.3% in 2019, which remains within the bank's 3%-6% inflation target range.
7.25%
Forecast by Momentum Investments of where the repo rate will be by the end of 2020 after the Reserve Bank hiked it to 6.75%
Last month the Bank indicated that it was at least 20 basis points behind in terms of hiking rates as it had adopted a more accommodative policy stance due to the weak economy and had kept rates on hold following a cut in March.
Mpho Tsebe, an economist at Rand Merchant Bank, said: "Which means that they were supposed to have hiked earlier in the year - in July or September."
Tsebe said if the Reserve Bank had not hiked interest rates this week it would have had to hike rates more aggressively by at least 50 or 100 basis points next year, given the inflationary risks.
"The Reserve Bank wouldn't want to put themselves in a situation we saw in Turkey and Argentina, where they were forced to hike aggressively because they did not do so when all indicators were pointing to inflationary pressures," Tsebe said.
But in September, GDP data revealed that the economy had slipped into a recession after GDP contracted by 2.2%. There was also no clear indication yet of how the economy had fared in the third quarter.
"That was the biggest concern from the group that voted for a no-hike. They would have wanted to see how the economy evolved," Tsebe said.
But she added that the third-quarter data on mining, manufacturing and retail sales pointed to a recovery in growth. "Most of the estimates for growth in the third quarter are pointing to growth at around 1.5%. Annual growth for the year is on target to average between 0.5% and 0.7%."
Although oil prices have retreated to below $65 a barrel and the rand is trading below R14, there are longer-term risks, such as that the oil price will rise and the rand will weaken further.
A key risk is that investors are dumping riskier emerging-markets assets in favour of the safe-haven dollar as US interest rates rise, which raises the prospect of the rand weakening and rising inflation.
At the same time, oil prices could rise next year when US sanctions against oil producer Iran are expected to come into full effect.
In SA, electricity tariffs are expected to rise by higher than the Reserve Bank's assumption of 8%.
Tsebe said: "If the risk-aversion environment intensifies, the rand could go back to the levels that we saw between March and September, where it depreciated quite significantly, trading at R15 [to the dollar] at some point."
The next MPC meeting is in January.
Sanisha Packirisamy, an economist at Momentum Investments, said: "Our house view is for hikes to peak at 7.25% [two hikes of 25 basis points] by the end of 2020."
speckmana@sundaytimes.co.za..