What are interest rates and how do they affect you?

Interest rates have gone up several times in the last few months in South Africa, and it looks like they will keep rising for the foreseeable future. So, this begs the question: what are interest rates, why are they rising, and how do they affect you?

What are interest rates?

There are two concepts that one needs to consider. First is the repo rate, which is the rate at which banks can borrow money from the South African Reserve Bank. The current repo rate is 6.25%. The second consideration is the prime rate, which is the interest rate that banks charge their customers on credit products such as home loans. The current prime rate is 9.75%.

So, why are interest rates rising?

The Reserve Bank, which meets six times a year, uses interest rates to manage inflation. Inflation is simply how much a weighted basket of goods and services, such as groceries and petrol, goes up from one period to another. The changes are expressed in percentages, and since South Africa’s inflation target is between 3% and 6%, the Reserve Bank’s mandate is to maintain this target range. Currently, South Africa’s inflation rate is 7.6%. The high inflation is due to several issues, but the main one is the rise in oil and agriculture commodity prices like wheat and sugar. This means that it costs more to transport goods and produce necessities such as food.

What does this mean for the consumer?

If you have credit, whether it’s secured or unsecured, and the interest rate goes up, your monthly repayment will go up as well. For example, a R1 million bond repayment will cost about R485 more per month now that the interest rate has gone up by 0.75%. This will unfortunately limit your spending as goods costs more.

Below are some quick tips to manage the strain of rising interest rates on your pocket:

  1. Keep track of what you spend. See where your money goes and if there are ways to cut back on some of the spending you don’t have to do. For instance, you could spend less on take-aways and treats and put that money toward your bond or other credit. Use tools like the Track your Spend feature on the FNB App.
  2. Move your credit debit order as close as possible to the date you get your income. This way, you’ll know that your debit order has been paid and won’t have to worry about keeping money aside for the rest of the month.
  3. Look at other ways to free up cash, such as using your loyalty programmes, like eBucks, to supplement your necessary spend such as groceries, fuel and toiletries.
  4. Food prices have gone up in the last few months, so look for ways to save money on food, like buying non-perishables once a month and creating a weekly menu from the pantry, then only buying a few fresh things every week.

The good thing about the interest rate cycle is that if you have savings, such as emergency savings or you live off the interest from cash investments, the interest on these savings should also go up. This means that more interest will be earned, so more interest will be paid every month.

If you do free up cash via the tips above or alternatively the increase on interest paid on cash investments, think about using that to pay off any expensive credit that you may have, saving for an emergency or putting towards your longer-term goals such as retirement savings.  Keep track with your budget and your spending using the FNB Smart Budget on the FNB App.

Ester Ochse, product head, FNB Integrated Advice.

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