The SARB has announced yet another reduction in the repo rate from 3,75% to 3,5% last week. This 25 basis point* reduction will have an impact on all South Africans, so we’ll break this down into how this affects you as a consumer, investor and saver below.
The repo rate is the interest rate as which the SARB lends to our commercial banks in South Africa. This is different from the prime lending rate. The repo rate has a big impact on the interest rates which the commercial banks charges to its consumers – all of us.
The prime lending rate is the rate at which commercial banks lend to me and you – they adjust this slightly upwards or downwards depending on your risk profile. As you can see, the repo rate does indeed impact the prime lending rate and the rate at which you pay to borrow or save with your bank.
How it affects me, the consumer?
Looking for a new car, house or thinking of taking out that store credit? The repo rate reduction will result in lower borrowing costs for you as the consumer. The lower interest rates may be tempting for you to want to purchase more items as these become relatively cheaper to a week ago, but you shouldn’t spend mindlessly. See this as an opportunity for you to reduce the amount of money you currently owe.
It’s important to note that repo rate cuts won’t be around forever. Many people make the mistake of not taking the long-term into consideration and end up sitting with huge amounts of debt they can’t afford a few years down the line. So, what should you do? Rather use a pre-lockdown interest rate to calculate whether you can afford those expensive items – especially houses and cars which tie you into long-term contracts.
How it affects me, the investor?
This will largely depend on what type of investment instruments you hold or, in most cases, what type of instruments your unit trust holds. If you are invested in shares of listed companies, it also depends on the operating structure of the company. If the company has a lot of debt, they will now have lower interest repayments which result in increased profits.
How it affects me, the saver?
The reduction in the repo rate will affect your savings potential depending on what type of savings instruments you hold. You will see a drop in any savings if your money is in an instrument which is linked to the interest rate – this means that your savings amount changes as the repo rate changes.
On the other hand, if your money is held in instruments which have a fixed interest rate, your savings amount will not change. This means that those people who took out these types of instruments before the coronavirus pandemic hit are winners.
Now that you have a better understanding of what the repo rate reduction means, you can take advantage of the recent repo rate cut by first reducing your level of credit and then taking advantage of any other purchasing opportunities if you have the means to.
Words of the Week
basis point – a common measure of interest or other rates in finance. One basis point is equal to 0.01%.