The repo rate – short term pain
On 21 July 2022, at their most recent meeting, the monetary policy committee of the South African Reserve Bank (SARB) voted to increase the repurchase rate (repo rate) by 75 basis points to 5.5%, in other words by 0.75 of a percent.
What is the repo rate exactly? As per the SARB website (https://www.resbank.co.za), “The repo rate is so called because banks give the SARB an asset, such as a government bond, in exchange for cash. They can later repurchase (repo) that asset at a lower price, which reflects the interest they paid (i.e., the repo rate) to have the cash.”
This increase in the repo rate has resulted in commercial banks increasing their prime lending rate, which in turn led to an increase in the amount we have to pay on our debt like credit card payments, home loans and personal loans. This is painful, especially in an environment of shrinking disposable income due to increased fuel and food costs.
This pain will be temporary, but not so short lived. The governor of the SARB, in his speech on 21 July 2021 mentioned that “By the fourth quarter of 2024, we expect headline inflation to revert to the mid-point of the target range, on the back of declining fuel and food inflation.” We are therefore in for some more pain in the next few months and should plan for it.
Economic growth and declines, as well as interest rates fluctuations are cyclical. We have been at these levels before fairly recently and will be here again sometime in the future. This is illustrated by the two graphs below.
If we know these fluctuations are cyclical, we can learn to cope with it better. Some of the things we can do to create a buffer against these interest rate shocks, are to:
- Not borrow to the maximum that we qualify for, but to rather leave some room for future interest rates hikes.
- Pay off more of our debt or increase our repayment amount to above the minimum required during times of lower interest rates.
- Not fall for the typical marketing ploys to “buy while the rates are low.”
As the saying goes, “the more things change, the more they stay the same.”