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Here’s How the Repo Rate Impacts Your Pocket

Here’s How the Repo Rate Impacts Your Pocket

22 July 2024

Understanding the repo rate can give us insight into our own financial reality so that we can make informed money decisions. While the South African Reserve Bank (SARB) recently reviewed the repo rate and left it unchanged at 8.25%, a rate cut is still on the cards later this year.

Ayanda Ndimande, Strategic Business Development Manager at Sanlam Retail Credit, says it’s worth noting just how the repo rate impacts your pocket.

This repo rate plays a crucial role in shaping the South African economy and directly impacts the finances of millions of citizens, with far-reaching effects on South Africans, businesses, and the broader economy.

Ndimande says the repo rate is more than just a number announced by the SARB. “It’s a powerful tool that influences everything from your monthly bond repayments to the interest you earn on your savings. Understanding how it works is crucial for making informed financial decisions and achieving long-term financial wellness.”

What is the repo rate?

The repo rate, short for repurchase rate, is the interest rate at which the SARB lends money to commercial banks. This rate is a benchmark for all other interest rates in the economy.

Ndimande elaborates, "Think of the repo rate as the foundation of our financial system. When the SARB adjusts this rate, it creates a ripple effect throughout the economy, affecting borrowers and savers."

How does the repo rate work?

When the SARB increases the repo rate, it becomes more expensive for commercial banks to borrow money. As a result, these banks typically pass on this increased cost to you, the consumer, by raising interest rates on loans and credit facilities.

Conversely, when the SARB lowers the repo rate, banks can borrow money at a cheaper rate, potentially leading to lower interest rates for South Africans.

"The repo rate is a delicate balancing act. The SARB uses it to manage inflation and maintain economic stability. A higher repo rate can help curb inflation by making borrowing more expensive, which can slow down spending and economic growth. On the other hand, a lower repo rate can stimulate economic activity by making borrowing more affordable."

The impact on your personal finances

Changes in the repo rate can have significant implications for your finances. Here's how:

  1. Home loans: "For many South Africans, their home loan is their largest financial commitment. When the repo rate increases, so do your monthly bond repayments. For example, on a R1 million home loan, a 1% increase in the interest rate could translate to paying nearly R700 more per month."
  2. Vehicle finance: Like home loans, car payments are also affected by repo rate changes. “An increase means higher monthly instalments for those with vehicle finance agreements.”
  3. Personal loans and credit cards: Ndimande says the repo rate also influences the interest rates on this form of credit. "When the repo rate goes up, the cost of servicing your personal loans and credit card debt increases."
  4. Savings and investments: Thankfully, Ndimande says it's not all bad news when the repo rate rises. "Higher interest rates can benefit savers and investors. You might see better returns on your savings accounts, fixed deposits, and other interest-bearing investments because of a repo rate increase."

How to make informed financial decisions amid repo rate fluctuations

Given the significant impact of the repo rate on personal finances, Ndimande offers some advice for South Africans.

  • Stay informed: Keep track of repo rate announcements and understand how they might affect your finances
  • Review your debt: "If you have variable-rate loans, consider how potential rate changes might impact your repayments," Ndimande advises. "It might be worth exploring fixed-rate options for more stability."
  • Build an emergency fund: Having savings to fall back on can help you weather periods of higher interest rates.
  • Seek professional advice: "A financial adviser can help you navigate the complexities of interest rate changes and adjust your financial strategy accordingly," Ndimande recommends.
  • Consider your investment strategy: In a rising interest rate environment, you might want to reassess your investment portfolio to take advantage of potentially higher returns on interest-bearing investments.

Empower your financial future with knowledge and support

Understanding how the repo rate affects your financial situation can help you make informed choices and adapt your strategy as needed, whether you're a borrower, a saver, or both.

Ndimande encourages individuals to use the resources available through Sanlam Credit Solutions, like credit management coaches, to help them understand how changes in the repo rate might affect their credit score and overall financial health.

She concludes, “Sanlam offers tools like our Credit Dashboard, which can help you monitor your credit health and make informed decisions about borrowing and saving. Our team of expert financial advisers can provide personalised guidance to help you optimise your financial strategy during repo rate fluctuations. From managing debt effectively to maximising your savings potential, we can support your journey towards financial confidence by helping you navigate these complex financial waters.”