Indebted South Africans will have to dig further into their pockets following the South African Reserve Bank's (SARB's) Monetary Policy Committee (MPC) announcement of the hike in the repo rate by 50 basis points.
The repo rate will now stand at 11.5 percent.
Reserve Bank Governor Tito Mboweni told reporters on Thursday that ..."the MPC has decided that it is appropriate at this time to increase the repo rate by 50 points basis which will bring [the repo rate] to 11.5 percent."
This means that commercial banks prime overdraft rates will almost certainly rise by 0.5 percent to 15 percent from the current 14.5 percent.
"The inflation outlook is being influenced by a series of supply-side shocks emanating from the international oil and food prices which are posing challenges for inflation-targeting countries in general," the governor said while explaining the reasons for the hike.
Domestically, he said there was evidence of generalised price pressures and the prospect of further substantial electricity price increases will also delay the return to within the inflation target range.
In the light of these developments, inflation expectations have deteriorated, he said.
The central bank's previous policy tightening has not tamed inflation, which has largely been driven by rising international food and fuel costs, but consumer spending has cooled sharply.
Grain, dairy and meat prices are all heading for record highs, thanks to a combination of poor harvests and booming demand from developing countries like China and India.
Oil prices are also near lifetime highs as turmoil in the Middle East creates supply fears and demand from China and India explodes.
Because these commodities are priced in global markets, nothing that the Bank does can lower these prices.
The Bank left the repo rate steady at its January meeting, citing concern over growth.
Since then, though, CPIX jumped further away from the 3 to 6 percent band to 9.4 percent year-on-year in February, while more signs emerged of slowing growth.
Business and consumer confidence has dived, vehicle sales have fallen and manufacturing activity plunged to a four-and-a-half year low in March.
Power shortages set to last for another three years will add to the threat to growth posed by a global credit crunch, which has prompted a wave of foreign selling of South African shares and bonds.
Econometrixt Economist, Russels Lamberrti on Wednesday predicted that the interest rates would be hiked.
"Taking into account the inflation situation which has worsened since the previous meeting, the committee might hike the rates but I have to say that it's a close call," Mr Lamberrti told BuaNews.
Mr Lamberrti believes the inflation rate's remaining higher than the Reserve Bank's target range, is some of the reasons for the hike.
Inflation is now expected to peak at an average of around 9.3 percent in the first quarter of this year, and thereafter to follow a downward trajectory.
However, CPIX inflation is now expected to return to within the inflation target range by the fourth quarter of 2009 and to average 6.7 percent in 2010. - BuaNews
Compiled by the Government Communication and Information System