The South African Reserve Bank's decision not to hike its key interest rate was a positive development for business and consumer confidence, Business Unity SA said on Thursday.

"On a balance of risks, Busa sees holding interest rates unchanged at this point in time as the right decision."

Although the short-term inflation trends suggested that inflation would get worse before it got better, recent economic evidence indicated the medium-term inflation outlook — on which inflation targeting is based — had improved considerably.

"The fall in oil prices, the strengthening of the rand, the slowing of consumer demand in the economy, and the changes in the way the CPIX is to be calculated in future all indicate that inflation could be back within its official three to six percent target range by the end of 2009."

Two-year lag

Busa added that with ten rises in the SARB's repo rate since mid-2006, it could take up to two years for interest rate increases to have an impact on the economy.

"There are inevitable time-lags in the implementation of monetary policy," Busa said.

However, Busa believed that South Africa was relying too heavily on interest rates to drive adjustments in the economy.

"The rapid and effective implementation of supply-side measures through AsgiSA to boost production and a sensible 'administered prices' policy would help to stabilise the economy," it said.

Sapa