When the Reserve Bank increases the repo rate, it helps to put the brakes on inflation.
Inflation is the rise in prices of things we buy, and it’s important to keep it in check or you can develop a run away situation such as been seen in Zimbabwe and Turkey in the recent past.
Businesses who can’t afford price increases begin to push up their prices which places clients under pressure to earn more. So, those clients begin to charge more for the work they do and it can begin to spiral out of control. As can the use of credit.
Higher rates for credit tend to make people not take on more credit and to focus on repaying what they have already loaned.
Right now, inflation in South Africa is sitting just over 6%, (a tiny bit higher than the target range of 3 – 6% that the SARB MPC have in mind). So, raising the repo rate can be a way to keep things under control and make sure prices don’t go crazy.
