What is the Repo Rate and How Does It Affect Me?
What is the Repo Rate?
The South African Reserve Bank (SARB) regulates our economy by lending money to the commercial banks at a set interest rate. This interest rate is known as the repo rate and is also referred to as the repurchase rate.
SARB regulates the interest rates that commercial banks charge us, as consumers, for financial products, to prevent an excessive growth of bank lending and counter inflation. Inflation refers to the rate at which prices for services and goods increase over the years.
How Does the Repo Rate Affect Me as a Consumer?
A rise or drop in the repo rate can significantly influence inflation and consumer buying power. A decrease in the repo rate means the commercial banks can borrow more money from SARB at a cheaper rate, meaning lending rates for consumers also decrease!
The interest rate that commercial banks lend to consumers at is called the prime lending rate. A reduction in the prime lending rate gives you the opportunity to borrow more money. However, as a rule, you really shouldn’t be taking out anymore loans, if you are already over indebted.
If you have an existing bond or loan (not fixed-rate) you will be charged a lower interest rate and given the option to reduce the monthly instalment you currently pay, or carry on paying the same repayment and, as a result, will reduce your debt faster!
However, a reduction in the repo rate and a subsequent increase in funds also leads to the Rand becoming more vulnerable to inflation. On the other hand, if interest rates increase, consumers will have less money to spend, causing the economy to slow and inflation to decrease.
What is the Repo Rate in South Africa Now?
On 26 March 2015, the SA Reserve Bank announced that the repo rate would stay 5.75%, the rate at which it has remained since the 25 basis points increase in July 2014, from 5.5%.
Similarly, Nedbank announced that there will be no change to their current prime overdraft rate, the mortgage rate for home loans, or to the rate for vehicle and asset finance. Absa and FNB’s prime lending rate remains steady at 9.25%. While, inflation hit a low of 3.9% in South Africa this year.
Therefore, we as South African consumers won’t be enjoying lower interest rates for loans this year, but the lower inflation rate will mean better prices for goods and services.
How Can Understanding the Repo Rate Help Me?
Knowledge is power! Understanding the implications that the repo rate, prime lending rate and interest rates will have on you as a consumer and credit user will allow you to manage your finances better. Simply realising how much your personal finances are affected by the state of the economy should prompt you to prioritise your debts and pay them off while you are able to.
As you can see, there is a lot to factor in, when considering taking out credit, whether it be a credit card, store card, vehicle finance or a personal loan. You need to gauge how beneficial or detrimental the loan could be to your financial well-being, if circumstances were to change suddenly.
Ask yourself, is the loan essential? Will it complicate my life? Will I be able to pay it back, without putting strain on my living expenses? Will it put me at risk of falling into arrears? Will I have enough money to cover an emergency/accident? Will I be able to take care of my family?
Essentially, understanding the way our economy works will enable you to practice better financial habits, for a better quality of life and a financially secure future.
If you are concerned that future changes to the repo rate will affect your ability to make your debt repayments, you should contact National Debt Advisors immediately. We’ll negotiate with your creditors for alternative payment arrangements that will be more affordable and manageable for you.