African Reserves Loans

EXPLANATOR | Who sets interest rates and how do they affect me?

  • Interest rates are the percentages at which you pay interest on a loan or earn interest on the money you save. The South African Reserve Bank sets a key interest rate known as the repurchase or repurchase rate, which is increased or decreased to manage inflation and the value of the rand.
  • Banks borrow money from depositors and then lend it to you, the consumer, at interest rates based on the prime rate. The prime rate is based on the repo rate and includes a margin for the bank.
  • Banks and other credit grantors use your credit history, the value of your loan against any loan collateral, this property in the case of a home loan, and your ability to pay the loan to determine an interest rate. individual interest based on the prime rate. assess.
  • If you borrow or save money at a variable interest rate, the rate will rise or fall with the repo rate. If you borrow or save money at a fixed rate, that rate will be fixed for the life of the loan at a rate that the lender or bank thinks will always be profitable depending on how interest rates are likely to change. in the future.
  • Get the biggest business stories sent by e-mail every day of the week, or go to The front page of News24 Business.

Interest rates are the rates at which you pay interest on money you borrow or earn interest on money you save. They are expressed as a percentage of the amount you borrow or save.

These rates are influenced by the interest rate set by a country’s central bank at which it lends money to banks or at which banks can deposit money with the central bank. In South Africa, the central bank is the South African Reserve Bank (SARB).

When the SARB raises or lowers its interest rates, you will hear or read about it in the news usually with a message about whether it will be more or less expensive to borrow.

Shortly after the announcement, if you have borrowed money at what is called a variable interest rate, you will be notified by your bank or other credit provider that the interest rate has changed.

If you have money saved, you will also be notified – perhaps a little later – that the interest rate you are earning has increased or decreased.

Why does the SARB set interest rates?

The SARB is responsible for controlling inflation through its monetary policy framework. It does this by setting an appropriate interest rate to keep inflation low and relatively stable.

The rate set by the bank is known as the repurchase or repurchase rate. This is the rate that banks must pay the SARB when borrowing money from it and the rate at which they can deposit money with the SARB.

They use this rate to set their own rates to lend to you or to pay you when you save, but you won’t pay or get paid the repo rate on what you borrow or save. Banks have costs to cover and will therefore pay you less and charge you more than the repo rate when they take deposits or extend credit.

The SARB increases its interest rate in order to curb inflation as measured by the consumer price index (CPI). It cuts interest rates when inflation is below the target inflation rate to stimulate the economy.

The SARB’s Monetary Policy Committee meets every two months (January, March, May, July, September and November) to decide whether to raise, lower or leave interest rates unchanged.

It currently aims to keep inflation between three and six percent.

The committee, with input from SARB economists, will examine what is happening in the local and global economy and then determine where to set interest rates given the likely impact on inflation and the economy.

Rising interest rates:

  • Increase costs for those who have borrowed money at variable interest rates and therefore discourage borrowing and spending. It also promotes savings because you can earn more on your savings. This, in turn, weakens demand for goods and services, business growth and lowers prices. It can also lead to job losses and this must be weighed against the negative effects of higher inflation if interest rates are not raised.
  • Tendency to strengthen the rand exchange rate because returns on foreign investment in rand increase, so capital flows into the country. A stronger rand reduces the price of imported goods.
  • Signals to those selling goods and to employers that the SARB is committed to controlling inflation and that they do not need to increase goods and wages and salaries to compensate for high inflation. It is important to control inflation expectations, because inflation expectations in particular guide wage negotiations.
  • Reduce demand for homes which moderates home prices. This can reduce the wealth of those who own homes, causing them to buy less and slowing the economy.
  • When the SARB is ‘hawkish’ it thinks interest rates need to rise to curb excess demand and inflation, and when it’s ‘accommodative’ it thinks interest rates need to fall to spur growth. demand and inflation.

What interest rate should I pay or earn when I borrow or save?

Individual banks can set their own interest rates which they will charge you when you borrow or pay you when you save.

These interest rates will however be derived from the repo rate but will generally be higher to cover the banks’ costs, but no more than the rates set in regulations under the National Credit Act.

The prime interest rate is a term used to describe the prevailing interest rate at which banks lend to you, as a consumer. This is currently the repo rate plus 3.5%.

When you are offered a loan, such as a home loan, it may be prime or higher. The lender will consider the risk you pose as a borrower and set the rate accordingly. Banks must always pay interest on money deposited in the bank even if borrowers do not pay the interest due on what has been lent to them.

If, for example, you have a good credit repayment history, your income and expenses allow you to repay a loan affordably, and the value of the loan relative to the property you are buying is not too high, you’ll probably get a good interest rate closer to or at prime.

You will also pay a higher rate if your credit is unsecured – for example, when you have a personal loan, overdraft or credit card.

There are, however, maximum interest rates that banks and other credit providers are allowed to charge. Most of them are based on the repo rate.

Fixed or variable rates

Banks and other credit providers charge or pay fixed or variable interest rates. Variable interest rates, also known as floating rates, change with the repo rate, while fixed rates stay the same for the duration of your loan.

If you borrow or save at a variable rate, it will rise or fall each time the repo rate rises or falls.

Remember, however, that banks set interest rates above the current prime rate based on their expectations of how interest rates are likely to move over the period for which your rate is fixed.

Similarly, if you are offered a fixed interest rate on an investment, it is likely to be fixed at an interest rate calculated by the bank based on how it expects the rate to be. repo evolves.

Do you have control over interest rates?

Interest rates go up and down with the repo rate and you have no control over that.

You should, however, consider rising interest rates when taking out a loan and ensure that you can afford any potential increases due to rising interest rates. Don’t take a home loan, for example, with a repayment that you will find hard to afford at the current interest rate. If the repo rate increases and your repayments with it, you might find repayments unaffordable.

You should also make sure that you have a strong credit report and a good repayment history. If you ever have problems repaying the credit, negotiate with the credit provider rather than ignore the problem.

This article was first published on SmartAboutMoney.co.za, an initiative of the South African Savings and Investment Association (ASIS).