Young YOU: news of the week
IN MAY, the South African Reserve Bank (Sarb) announced the third interest rate cut this year. The repo rate is now 3,75% – the lowest it’s been in 47 years. But what exactly is the repo rate and what does it mean if this rate is being reduced?
What does ‘repo rate’ mean?
The repo rate is a specific type of interest rate. The interest rate is the price you pay for borrowing money from someone. If a bank says you can borrow money from it at a 10% interest rate, it means for every R100 you borrow you must pay back an additional R10.
South African banks such as Absa, Standard Bank, FNB, Nedbank and Capitec borrow their money from the Sarb – that’s our country’s central bank and its main job is to manage our currency (the rand) and keep the economy stable.
The interest rate the Sarb sets for banks that borrow from it is called the repo rate. By determining this rate, the Sarb makes it cheaper or more expensive for commercial banks to borrow as it
What’s the effect of a lower repo rate?
Individual banks’ interest rates on loans are linked to the repo rate. If the repo rate decreases, and it gets cheaper for banks to borrow money from the Sarb, it becomes cheaper for South Africans to borrow money from their banks. If the repo rate increases, banks need more money to pay the Sarb, and so they charge higher interest rates on loans.
If your parents borrowed money from the bank to buy a house or a car, a reduced repo rate means their monthly instalments to the bank also decrease.
But a lower interest rate isn’t good news for everyone. You can also earn interest on money you invest in the bank in fixed deposit accounts. When the bank’s interest rates for these types of accounts are cut, you earn less interest and your savings don’t increase as quickly.
It’s a disadvantage especially for people who live off a pension if their pension is invested in an interest-bearing account. The rate reduction means the value of their investment increases more slowly, with the result that their pension won’t last as long as they’d initially planned.
Why the decrease in repo rate?
The national lockdown caused by the coronavirus pandemic has had a huge impact on our economy. Businesses that stopped operating during lockdown lost a lot of money, and some might not be able to reopen. Many of the businesses that kept operating can’t pay their employees as much as before the pandemic. This means many South Africans are earning less and may even become unemployed.
By cutting the repo rate, the Sarb is trying to ease the burden of debt for people. If their monthly instalments to their bank are smaller, they have more cash available to spend on food and other essentials. When people have more cash to buy food and clothing it has a positive impact on business and the economy.
A lower bank interest rate also encourages people to take out a loan. Someone might consider buying a new car – which they wouldn’t have done before the interest rate cut. Each car sold is good for the motor industry and everyone who works in the industry.
Businesses will probably also find it easier to access loans to get back on their feet – another boost for our economy. This is what people mean when they say the economy is being stimulated.