Despite economists and analysts across the board forecasting a 100 basis point increase, Reserve Bank Governor Tito Mboweni on Thursday raised the repo rate by 50 basis points.
"In light of further deterioration in the inflation outlook, but mindful that the economy is responding to a less accommodative monetary policy stance, the Monetary Policy Committee [MPC] has decided that at this stage further tightening of the monetary policy is warranted.
"Accordingly, the repurchase rate will be increased by 50 basis points to 12 percent per annum with effect from 13 June 2008," said the governor.
The outlook for inflation remains bleak in an environment of sustained increases in international oil and food prices.
Internationally, countries are experiencing increased inflationary pressures amid slowing global economic growth and rising commodity prices.
"Domestically, price increases have become more broad-based, and inflation expectations have deteriorated further."
Adding to the inflation uncertainty is the impending judgement next week by the National Energy Regulator of South Africa on the proposed electricity price increases.
"Consumer Price Index excluding interest on mortgage costs [CPIX] inflation is now expected to peak at around 12 percent in the third quarter of 2008 and will return to within the inflation target range by the third quarter of 2010," said the governor.
The bank's previous CPIX forecast was a peak of 9.3 percent, but CPIX for April 2008 came in at 10.4 percent, compared to 10.1 percent the previous month.
Sustained food and petrol price pressures were primarily but not only responsible for this trend, he said.
Petrol has increased by some 30.5 percent year-on-year (y/y), whilst food prices have also risen by 15.9 percent.
"Together these two categories account for over half of the increase in CPIX," he said.
There were calls for food and petrol to be removed from the CPIX basket of goods, or for the basket of goods to be weighted differently.
Mr Mboweni, however, said even if food and petrol were removed from CPIX, inflation would measure 6.1 percent, still above the 3-6 percent target band set by the bank.
"There has been no respite from the acceleration in the international oil prices which has continued to surprise on the upside.
"In recent days North Sea Brent crude oil prices reached levels of almost $140 per barrel, compared to $107 per barrel at the time of the previous MPC meeting," he said.
Answering questions, the governor said while the effects of rising interest rates were not meant to "punish" anyone, people should not lose focus of the primary mandate of the Reserve Bank, which is to bring inflation back to within the target band. - BuaNews