What to Expect with the Interest Rate Change on 19 Sep

Have you heard about the interest rate change coming on the 19th of September? The repo rate is expected to drop 25 (maybe 50) points this coming September. This is because of the strength of the Rand and rumours that the US repo rate will drop to halt economic downfall.

The national interest rate is called the repo rate, or prime rate. This is the minimum interest banks are allowed to charge. It’s the rate decided by a sector of our government, the South African Reserve Bank, or SARB. SARB gets together 6 times a year to discuss the state of the South African economy.

They discuss the national interest rate and whether it should be changed to reflect inflation.  Usually, lenders tack on a bit more to make more profit. When it goes up, loans become more expensive and vice versa. When the repo rate decreases, it can result in lower interest rates on savings accounts and fixed deposits. It’s also used to slow down economic activity, reduce borrowing, and reduce inflationary pressure.

How Will the .25 Point Decrease Impact Us?

The point decrease will make borrowing less expensive, which serves to stimulate economic growth. Borrowing will become cheaper, leading to more spending and the strengthening of our economy. It could also attract foreign investment, further boosting the economy.

On the other hand, a decrease in interest rates could lead to too much demand for goods and services, inflating prices. This could lead to too much inflation, and the repo rate would have to go up again.

Some SARB members are nervous about lowering the interest rate because of current global economic uncertainty. The US is set to lower its repo rate because of its unemployment rate and low lending rates, but its economy is also very much in the air. Also, with current wars, no one is certain about how European and Middle Eastern monetary policy might change, which could affect oil, petrol prices and import demand.

What Influences the Repo Rate?

The repo rate is influenced by current interest rates, inflation, and our currency’s strength. Global interest rate trends, especially those set by the Reserve Bank, can impact SARB’s decision. If its interest rates rise, SARB usually follows suit.

Monetary policy’s primary goal is to maintain price stability. If inflation rises above the target range, SARB increases the repo rate to reduce demand for goods and services and mitigate spending. Interestingly, the Rand’s weakness or strength can also influence the repo rate, as a weaker Rand influences import costs and makes borrowing more expensive.

Recently, the Rand has gotten stronger, leading to less inflation. This is why a point decrease is being discussed.

Why Does the Repo Rate Matter?

The repo rate is important because it limits the interest banks may charge, manages inflation, impacts the Rand, achieves sustainable economic growth, and influences investment decisions.

When the repo rate changes, banks tend to raise their prime lending rates, affecting borrowing costs for consumers and businesses. Additionally, SARB uses the repo rate to manage inflation. Raising the repo rate can make borrowing more expensive, which can help to slow down economic activity, lowering inflation. The repo rate can also impact the exchange rate of the South African Rand. If the repo rate is lower than interest rates in other countries, it can attract foreign investment, strengthening the Rand.

Lastly, the repo rate impacts the banks’ prime rate. Note that though the repo role plays a role in interest banks charge, it doesn’t necessitate that you cannot be charged more or less than the prime. If you have an especially good credit record, you may be charged less than the prime rate.

A History of the Repo Rate

The repo rate lowering is exciting because it’s the first decrease since COVID. Since July 2020, interest rates have been lower than ever, and the Rand is stronger than usual.

The repo rate was introduced in 1998 as South Africa’s main monetary policy medium. Going into the 2000s, SARB focused on stimulating economic growth with low interest rates. Remember the 2008-2010 global economic crisis? During this time, the SARB set the repo rate much higher to curb inflation and stabilise our economy. The repo rate gradually declined over this period, reaching a record low of 3.50% in July 2020. This was in response to weak economic growth and deflationary pressures.

Since the arrival of COVID, the repo rate has been on an upward trajectory, thanks to inflation and economic uncertainty. The Rand has also been weaker because of higher import costs and less global investment.

The South African Economy

With the formation of the GNU, South African policy around immigration and corruption has vastly changed. Home Affairs has implemented the expedition of foreign visas, particularly with the digital nomad visa, which aims to attract well-off foreigners who will pump their strong foreign currency (Euro, Dollar) into our economy with their strong buying power. South Africa is an attractive destination for them because of our comparable low cost of living and beautiful landscapes.

The reduction of loadshedding is also a strong factor, as this enables better business operation and thereby economic growth. In addition, the repo rate decrease will make for more foreign investment and a stronger rand, further strengthening the economy.

It’s important to note that the .25 decrease in the repo rate is purely speculation, and nothing has been announced yet. The US monetary policy committee is set to announce their repo rate change the day before ours meets, which can hugely impact SARB’s discussion and decision.

What Action Should You Take?

As interest rates go down, you’ll probably see lower debt repayments and inflation drop. This will make debt payoffs easier and is supposed to drive down the cost of living, if only incrementally.

If you’re struggling to pay off debt, try debt counselling. We consolidate all your debt repayments into one easier, cheaper monthly repayment for everything from credit card debt to auto loans. This is because we negotiate with creditors for lower interest rates, longer repayment periods, and less on your debt repayments. You’ll also gain legal protection from creditors, meaning no one can sue you for defaulting.

Apply now! Contact Debtco Group for personalised financial advice and help living a debt-free life today. You could be debt-free in 3-5 years.