The fourth increase this year

On Thursday the repo rate was increased by 0,75%, which will push the prime overdraft lending rate to 9%. This is the 4^th increase in the repo rate this year, resulting in a cumulative increase in monthly instalments on a bond of R2 000 000 of R2 187 during 2022. This creates additional financial pressure for homeowners with bonds. The adjustments follow in an effort to curb accelerating inflation and protect the weakened Rand.

Let's explain why the repo rate keeps increasing.

The Reserve Bank has a mandate to keep inflation at targeted levels, and one of the tools used, is by managing the repo rate. Popular economic theory dictates that when inflation is rising the Reserve Bank should increases the repo rate to reduce borrowing and thereby reduce the money supply to the economy. This then reduces the demand for goods. With lower demand we get a lower rate of price increases, and this curbs inflation.

Our Reserve Bank has set an annual inflation target of between 4 to 6%. According to Stats SA, in June of this year the inflation rate reached a 13-year high, registering at 7,4%.

We have all seen prices rising across the board, from fuel to food, and this is a worldwide phenomenon caused by the shortages of supply that have resulted from the COVID-19 pandemic and more recently the Russian invasion of Ukraine. Inflation is therefore rising worldwide, and interest rates are also increasing worldwide.

If other countries raise their interest rates, they become a more favourable investment destination for foreign capital. Keeping our interest rates at the same margins vis-a-vis as these foreign countries therefore also protects our country against disinvestment and helps to stabilize our exchange rates.

Based on these factors, it looks probable that interest rates will continue to rise for the foreseeable future.