We have heard the word repo rate more times in a year than we’ve ever heard in a lifetime. When we hear that the repo rate is up by another 75 bps, automatically you are already estimating how much your car, household instalment, or any other debt you have is going to cost you monthly.

    Now more than ever, it is crucial that one understands bank interest rates and how they affect you. This can save you money and help you refrain from making bad financial decisions.

    We live in times that force you to take out that loan given your current financial emergency. Bank interest rates then determine how much more you are going to pay as opposed to the original amount.

    If the repo rate goes down once a year, then we are happy because that means your monthly instalment goes down. But later on, it goes up twice and you regret ever taking out the loan.

    Repo Rate

    In South Africa, interest rate decisions are taken by the South African Reserve Bank’s Monetary Policy Committee (MPC). The repo rate is the official interest rate. This rate, which is commonly displayed on an end-of-period basis, represents the rate at which central banks lend to or discount eligible paper for deposit money banks.

    At its meeting in November 2022, as was largely predicted, the South African Reserve Bank increased its benchmark repo rate by an additional 75 basis points to 7%. In order to more firmly anchor inflation expectations around the midpoint of the target band and hit the inflation objective in 2024, this is the seventh consecutive rate increase since policy normalisation began in November 2021.

    Unexpectedly increasing to 7.6% in October from 7.5% in September, South Africa’s inflation rate has now exceeded the central bank’s goal range of between 3% and 6% for six consecutive months. The prediction for the headline CPI was revised upward to 6.7% in 2022 (from 6.5% in September) and downward to 4.5% in 2024 (from 4.6%).

    Additionally, core inflation expectations were raised to 5.5% in 2023 (from 5.4%), but were maintained unchanged for this year at 4.3%. Meanwhile, due primarily to rolling blackouts, the GDP growth predictions were lowered to 1.8% in 2022 (from 1.9%), 1.1% in 2023 (from 1.4%), and 1.4% in 2024 (from 1.7%).

    What are interest rates?

    I have unpacked interest rates and how they are going up. But let me explain what interest rates are in simple terms.

    An interest rate is a percentage charged or paid on the total amount you borrow or save.

    • The interest rate is the expense incurred while borrowing money; as a result, it raises the total amount you owe.
    • The interest rate, which determines how much your savings will earn over the course of the investment, raises the total amount of savings if you save or invest your money in an account that pays interest on savings.

    Even a small change in interest rates can have a big impact on how much you owe or earn.

    • Lower interest rates are good for borrowing. You want a lower interest rate when you borrow money, such as when you use a credit card or when you take out a vehicle or home loan, as this decreases the total amount you will have to repay.
    • Higher interest rates are good for saving. A greater interest rate is desirable if you are saving money, for instance by investing it, as you will earn that additional percentage of interest and improve your overall income.

    The interest rates concept is one very complex but simple to understand. If it goes up, does it work in your favour? What about when it goes down? While you think about that, here is a key takeaway, borrowers are typically given a reduced interest rate when the lender deems them to be low risk.

    If the borrower is deemed to be high risk, they will be charged a higher interest rate, which raises the cost of the loan. Now that we understand what interest rates are, I hope we make better financial decisions the next time we borrow or save money.

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