Tawanda Rumhuma | Executive | Savings & Investments | Absa Group | mail me |
The repo rate, inflation and the reserve bank’s decisions all play a role in shaping our finances, from savings and loans to monthly payments. Understanding how these factors influence our financial wellbeing can help us make informed decisions and prepare for economic changes.
We aim to empower our customers with knowledge they need to stay on course and navigate the world of finance with confidence.
Every few months, we have to readjust our budgets, and just as we get used to it, the next announcement arrives. We heard the news report about the South African Reserve Bank’s (SARB’s) newest decision on the repo rate, which remained unchanged, and bringing relief to South Africans.
The role of repo rate when saving your savings
So how does the repo rate work? How is it linked to inflation? And who makes these complex decisions?
The SARB’s Monetary Policy Committee (MPC) and the National Treasury set a target range for inflation, which is currently 3% to 6%. This target helps measure whether prices for goods and services are staying stable across the country.
To keep inflation within this target range, the SARB uses a tool called the “repo rate”. The repo rate is basically the interest rate at which the SARB lends money to banks. By adjusting this rate, the SARB can influence the overall economy.
When the repo rate goes up it becomes more expensive for banks to borrow money which makes them charge higher interest rates to their customers which reduces borrowing and spending. When the repo rate goes down it becomes cheaper for banks to borrow money. This means you, as the consumer, benefit from lower interest rates which in turn usually encourages more borrowing and spending in the economy.
Saving your savings with interest rates
The repo rate gets its name from the word “repurchase”. Banks need cash to operate and lend to customers. To get this cash, banks temporarily sell something valuable (like a government bond) to the (SARB).
The banks agree to buy back (or “repurchase”) this item later at a slightly higher price. The difference between the initial selling price and the repurchase price essentially represents the interest the bank pays to the SARB for borrowing the money.
So, when the repo rate increases, interest rates on your loans will increase – meaning higher monthly instalments. However, the good thing is that interest rates on your savings and investments often go up too, meaning it’s possible to earn more interest even though you are paying more on your loans.
So how can we take advantage of this changing repo rate?
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When the repo rate goes up, your investments will grow faster, meaning it’s time to stash your cash
Take the time to look into new, risk-appropriate investments so you can grow your finances. For those starting out, it may be time to look into opening one of Tax-free Savings Accounts. With any investment account you open, the power of compound interest comes into play, where earning and retaining the interest received on your initial investment fast-tracks your earning potential as it increases your investment amount, therefore, increasing the interest received.
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Put money away as an emergency fund
If interest rates on your savings are also rising, now is the time to establish – or grow – your emergency fund. Most financial institutions recommend having enough savings to cover at least three months’ worth of expenses. That way you can remain financially stable in the event of an emergency.
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If the repo rate is decreasing, it may be time to pay off your debts
With overall lower payments on your loan, you can set aside the money you’re saving and put it toward further payment of the loan or other debts. Your monthly budget won’t have to change, and you’ll be working towards becoming debt-free.
For more information on the SARB and MPC, you can visit the Reserve Bank’s website.
The information shared does not amount to financial advice.
