It came as a shock to many South Africans when reserve bank governor Lesetja Kganyago announced an increase in the repo rate by 75 basis points to 5.5%.
The prime lending rate now sitting at 9%, which is more than what many economists expected.
The governor highlighted during a press conference that the continued price hikes in oil, leading to the rise in inflation, is just one of the reasons the South African Reserve Bank (SARB) has moved to increase the repo rate by 75bps.
“In the wake of the Covid-19 pandemic," said Lesetja, "and aggravated geopolitical tensions, the global economy has entered a period of persistently high inflation and weaker economic growth.
"Many developing economies are yet to fully recover from the pandemic, global economic conditions remain fragile, war in Ukraine will continue to impair production trade of a wide range of energy, food and other commodities.”
This is the fifth consecutive hike since November 2021, and it is one of the biggest hikes since 2002 when repo was hiked by 100 basis points.
While many economists predicted at least a 50bp increase, this spike has shocked many. So what are consumers to do?
Start budgeting and spending mostly on necessities rather than on things that they do not really need, says finance expert Nicole Ledimo.
“The repo rate is basically the rate at which the South African Reserve Bank will lend money to the commercial banks," she explains.
"If the commercial banks borrow money from the SARB, there will always be interest charges for you borrowing money from the bank.
"Let’s take a car as an example," says Nicole. "Unfortunately, you are going to pay more interest because the interest rate increased. So, when the repo rate increases, the prime lending rate increases, they go hand in hand with each other.”
South Africans must brace themselves for a further increase, says Elna Moolman, an economist at Standard Bank.
“We expect the repo rate to rise further in the coming months; it will most likely rise at least once more and at least by a further 75bps, which may be at the next interest rate meeting, or perhaps spread over more than one meeting.”
The government can only influence select prices, such as municipal tariffs; most prices aren’t set by government, she says.
“The Reserve Bank can hike interest rates to dampen demand, which typically curbs inflation pressure by making it harder to put up prices.
"Interest rate hikes also typically reduce inflation expectations, by convincing all the role players in the economy that the SARB will get inflation under control; this, in turn, limits their inclination to put up their prices or wages even faster. If we expect inflation to be high, we’re more inclined to demand higher wages and prices ourselves – the SARB wants to curb this.”
When can people start preparing for such? “Citizens can prepare for potential future interest rate hikes by following the actual and forecast inflation rate and by listening to the Monetary Policy Committee’s speeches, which can contain guidance on potential future rate hikes,” she tells us.
Elna adds we should start preparing for food prices to also go up.
"Fuel costs are very high, especially when compared to, for example, prices a year ago, but they may soon decline slightly. While food and fuel inflation rates are particularly high, there is quite a broad-based rise in prices underway, as the weaker rand exchange rate and high commodity prices and other input costs still get passed on to consumers.”
Nicole says the best we can do as consumers is avoid spending on non-essentials as much as we can.
“What is unfortunate now is that people are not suffering but struggling," she says.
"They need to think twice before spending money on certain luxuries. What I would suggest is for you to look at your budget and if you don’t budget, start budgeting, if you are, start looking for things that you can start cutting off.
“Try minimizing buying stuff on credit now, or do not buy things on credit at all because it is not a good idea to take any additional debt.
"Try paying off debt with the highest interest rates, like your short-terms things such as credits cards.
"Some people have credit cards with a 20% interest rate for example, so if you get any extra money, try to pay off.”