Repo Rate Hike Comes Early (As Expected)
The SA Reserve Bank Monetary Policy Committee announced a 50 basis point repo rate hike this month.
When you borrow money (loans and credit cards etc) you agree to pay interest on your loan. That interest rate (%) is often linked to the Repo Rate. The Repo rate is not set by the banks directly it is set by the SA Reserve Bank. Banks link their rates to the Repo Rate since this dictates how much they have to pay in interest themselves. Linking the rates ensures they are always making a profit on the money they have already loaned out.
Why The Big Increase?
The SARB Monetary Policy Committee feel that with the ongoing Eskom electricity cuts and the high level of inflation as well as slow economic growth (impacted by events like the floods in KZN) it was time to push the rate by double what they had originally hoped and sooner than they had hoped to do so. They still warn that the rates will continue to go up over the next year and a half.
Most economists had recently been warning that this was inevitable given inflation fueled by the ongoing war in Ukraine and loadshedding. There is even talk of extreme loadshedding threats of up to level 8 looming. Eskom recently seems to be fighting an internal war against vandalism and sabotage which is impacting on the economy in a significant way.
4.75%
The Repo rate now sits at 4.75%.
You Can Fix Your Rates
Many consumers do not actually know they can ask for fixed rates on many forms of credit. If the consumer does so the bank looks ahead and guesses what they will be paying (the repo rate) and gives the consumer a fixed interest rate figure that does not change over the lifetime of the loan regardless of what happens with the repo rate. Traditionally, the fixed rate that they give is a few percent higher than what a consumer who takes a linked rate will pay…at first.
Why would you ever take a higher ‘fixed’ rate?
Doing so may allow for better budgeting or planning since the consumer knows 100% what they will be paying each month with no variation. It may also be a bit of a gamble that the repo rate is going to go up a lot and the consumer may then end up paying much less long term than if the rate was linked.
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