South African Reserve Bank Governor Tito Mboweni came out fighting on Thursday when increasing the repo rate by 50-basis-points to 11.50 percent, highlighting an increase in inflation risks on a broader scale as a key concern.

While admitting the Bank had erred in not raising earlier (they had paused in January) the best thing now was to "deal with the problem before us", adding that " the battle with inflation will be long and hard".

The door thus appears open for further rate hikes if the current environment continues to worsen, and no doubt some improvement in inflation needs to be seen first before the tightening cycle can truly be called over.

"I think there's a good chance of further hikes," said chief economist from Cadiz African Harvest Asset Management, Adenaan Hardien, shortly after the result.

"While the latest interest rate decision was a difficult one to call, the outcome has made the next decision easier because of what it revealed of the Monetary Policy Committee's thinking," he explained.

Standard Bank economist Johan Botha says: "After considering available evidence of a deterioration in the inflation outlook and other data, the MPC today decided, in line with its mandate, that inflation is the greater evil."

"Inflation is clearly the MPC's main concern"

And global analysts Lehman Brothers concur with this thinking: "Inflation is clearly the MPC's main concern, reflecting the shift in rhetoric we have seen over the past two months."

Mboweni indicated that one of his major concerns is that although there are exogenous drivers of prices, these are translating into more generalised price pressures.

He had highlighted in parliament recently concerns over second-round effects, and noted higher trending nominal wage settlements as another key concern in his decision-making on Thursday.

Added to this is the fact that oil price risks have not moderated since the last meeting.

Another curve ball being thrown at policymakers is the volatility of the rand, which is weakening on a trade-weighted basis. The higher rates have already brought the rand back a tad to 7.80 after it hit 7.94 prior to the release. Higher rates tend to strengthen the rand as returns become more competitive. This should help crimp back high import costs to an extent and hence avoid inflationary effects coming from that quarter as SA's infrastructure drive continues full tilt ahead.

Mboweni noted in this regard that the rand had lost some 16 percent of its trade-weighted value since the beginning of the year.

While reluctant to forecast the influence of the electricity price hikes to come, Mboweni did say he wanted to speak to Eskom about this.

A bad scenario

He said simply that the scenario would be "bad" when the proposed electricity price increases were added to the inflation forecasts.

As it stands, the Bank now sees inflation peaking at an average of 9.3 percent in the first quarter of this year and thereafter to follow a downward trajectory, but only return to the target by the fourth quarter of 2009.

Potential electricity price increases could be as high as a nominal 60 percent this year with more increases in subsequent years badly skewing the picture.

With inflation forecasts now the key issue to watch as far as the repo outlook goes, a lot hinges on what is decided on the electricity front heading into their price decision in June.

What was interesting to note was that Mboweni admitted the Bank had considered a 25-basis-point increase in their deliberations. It is possible we may see an increase of this size at some point going forward.

Mboweni admitted afterwards that he was the "bearer of bad news" when it came to the inflation outlook, and this sums up the mood well, bonds being knocked by a full 20-basis-points on the day.

I-Net Bridge