Interest rates and how they affect your finances

All consumers hear these days are that interest rates are increasing, but they do not always know how it affects their finances. Just two weeks ago, the repo rate was increased again by 25 basis points, increasing interest rates to the highest it has been since 2009.

South Africans are not alone. Interest rates have been rising consistently worldwide and it does not look like this trend is going to stop anytime soon.

There is just no getting away from interest rates, as they affect everything from your bond to your savings and investments. But what are interest rates exactly? “Interest rates depict how much borrowing costs,” says Janine Horn, senior financial advisor at Momentum.

Why do interest rates keep rising? Horn says interest rates are increased at an arguably aggressive rate currently in efforts to control inflation.

“Usually, central banks have an inflation target or an inflation target band. An inflation target is like the sweet spot for inflation and it is important to keep the inflation rate at that level,” she says.

South Africa’s inflation target is between 3% to 6%, but according to Statistics SA consumer inflation is at a 13-year high of 7.8%, exceeding the target. Horn says interest rate hikes have an adverse effect for people with credit agreements.

“You can expect to pay more on all your credit agreements, including your home loan, loans, credit cards and store credit.”

However, while interest rate hikes negatively affect consumers with credit agreements, it is good news for people who apply the winning formula by consistently saving and investing.

Horn says these interest rate hikes will undoubtedly affect your financial plan and goals.