The Reserve Bank says its decision to hike rates by 25 basis points is a precautionary measure against possible second-round effects of inflation.

Second-round effects occur when initial supply shocks, such as high oil prices, spread into broader wage demands.

The move, which takes the prime lending rate to 10.75%, spells bad news for consumers with credit card debt, as well as home and vehicle loans.

Reserve Bank Governor Lesetja Kganyago said, “Our approach is to look through the initial effects of price shocks, while ensuring that they do not entrench higher inflation. Unfortunately, large, sustained shocks like those we are experiencing now are more likely to trigger second-round effects, where individual price changes evolve into widespread increases. To prevent this, we are adopting a more restrictive monetary policy, with rates above longer-term levels.”

The Institute for Economic Justice has expressed shock over the Reserve Bank’s decision to increase the policy rate, previously known as the repo rate. The conflict in the Middle East as well as Russia’s invasion of Ukraine are among the factors leading to higher oil prices and rising inflation.

Junior Researcher for Debt and budget policy at the institute, Liso Mdutyana, said, “For us, we felt as though holding the repo rate would have actually recognised that the policy rate is not an effective tool to address the current wave of inflation that we are facing, which is mainly coming from overseas. It’s coming from the oil that we import, which is largely refined, and it is coming from fertilisers that we also import. So, it’s really a shocker for us that they have decided to go ahead and increase the repo rate by 25 basis points.”