Interest rate hike: what it means
Stay vigilant and take the time to understand what rates rises mean for you, experts advise
Interest rates are getting higher and, if you have a mortgage or a car to pay off, you’re likely feeling the pinch. Last week, the South African Reserve Bank hiked the repo rate, which affects the cost of borrowing, by another aggressive 75 basis points. The increase lifted the prime lending rate to 9.75%. This means that a R1-million bond repayment will now cost about R485 more per month.
Why did the Reserve Bank hike the repo rate?
The Reserve Bank adjusts the repo rate to keep inflation in check.
Annual consumer inflation climbed from 4.6% in July 2021 and 7.8% in July 2022, before falling slightly to 7.6% in August. The Reserve Bank aims to keep inflation anchored between 3% and 6% — so, even as prices look to be falling, the rate of inflation is still uncomfortably high.
South Africa’s inflation is high, but not nearly as elevated as in some other economies. For example, some have forecast that inflation in the United Kingdom may hit a whopping 18% in 2023. In the United States, the annual inflation was 8.3% in August.
But inflation overseas, and how those central bankers respond to it, also affects the Reserve Bank’s decision making. This is because, when central bankers abroad — especially in the US — adjust their interest rates there is often a knock-on effect for the rand.
A weak currency means hotter inflation, as imported goods become more expensive. The rand has deteriorated significantly in recent months, with the local currency now heading towards R18 to the dollar. The rand’s weakness means that another repo rate increase is likely when the Reserve
Bank meets again in November.
High inflation hurts consumers, especially those living closer to the poverty line, as more of their disposable income goes towards paying for basic necessities, such as food and transport. On the other hand, higher interest rates typically hit wealthier households harder.
In the case of both inflation and interest rates, you as a consumer are paying more for the same, Benay Sager, the chief operations officer at Debtbusters, explains. This is particularly tough in an environment where average incomes have barely budged.
What should you do now?
Sager prescribes vigilance when it comes to the interest rate — adding that this is one of the critical lessons he has picked up during his nine years at the debt counselling firm.
You will feel the increase in interest rates, especially if you have secured credit, such as a bond.
“Go look at your bank statements. Look at what interest rates you are paying for the specific accounts you have and really understand how much that is costing you, what your cost of credit is,” Sager said.
Sager advises that, after figuring out how much your credit costs now, you compare it to how much you were paying previously and work out how much of your income is going towards paying it off.
If too much of your take-home pay is going towards paying back your lender, you may consider ways to lower the amount you owe each month by, for example, extending the term of your bond or vehicle finance agreement.
“That might not be an option, depending on your financial situation, but I think it is probably worth exploring,” Sager said.
“But I think it is really important that people understand the interest rate and what it is going to cost them. Because it is likely that, in exchange, the interest rate will go up. And actually, in the long term, you might find yourself in a worse position. So I think it is really key to understand that aspect.”
What about my savings?
The silver lining of the hikes is that you have the opportunity to accrue more interest on your savings.
However, Sager points out, the amount you earn on your savings account is usually lower than how much more the interest on your secured loans will cost you. So, when it comes to figuring out where to put your money — into your savings account or towards paying your debt — you first need to calculate how much the interest rate is costing you.
“You may feel good about having money in your savings account, because at least you’re saving for a rainy day and that is also important … But I would say just consider the interest rate as the primary determinant of where you put your money.”