Interest rate hike: why it's not all bad news

By admin
28 January 2016

The South African Reserve Bank has announced that interest rates will increase to 6.75% -- what does this mean for you? And is it all bad news?

It seems like yet another thing to feel depressed about – an increase in interest rates means higher home-loan repayments, car-loan  repayments... Pretty much anything related to credit that comes from an interest-bearing account.

South African Reserve Bank (Sarb) governor Lesetja Kganyago said the Sarb's latest inflation forecast has deteriorated, mainly due to the exchange rate assumption and expected higher labour costs, he said at the end of the Sarb's first monetary policy committee (MPC) meeting for the year.

The repo rate – the rate at which the Reserve Bank gives loans to banks that then loan money to us – is now at 6.75%. As a result the prime lending rate at which banks loan to us has increased to 10.25%.

But the Reserve Bank’s decision to raise the interest rate by 50 basis-points is a case of short-term pain for South Africa’s long-term gain, experts say. Just while Kganyago was speaking, the rand immediately firmed to R16,27 from R16,33. Of course, it might be difficult for cash-strapped consumers to see this particular cloud’s silver lining. But the key thing to keep in mind is it’s necessary to protect us from more financial pressure in future, economists say.

Fast fact: in 1998 interest rates shot up to about 25 percent. In 2002 it was about 15 percent.

If inflation gets out of control the Reserve Bank would have to implement more – and even steeper – interest-rate hikes.

You’d also have to pay more for the same basket of goods because rampant inflation results in higher prices for practically everything over time (inflation is, for example, why a loaf of bread now costs up to R13 instead of the R3 it did years ago).

This latest increase should encourage South Africans to save instead of relying on credit and to make South Africa an attractive investment destination.

Ditch credit and save, save, save

Higher spending can lead to higher inflation, so the Reserve Bank wants to dampen the appetite for credit by making the interest and repayments higher.

It will now become more difficult and costlier to get credit, says Vuledzani Ndou, an economist at economists.co.za told YOU after the 0,25% hike last year .

For example, you’ll pay more if you bought your car at a variable interest rate. And small businesses paying off loans could pass on the additional cost to their clients.

“The biggest impact will be felt by those with home loans,” says Wendy Monkley of DebtBusters, SA’s largest debt counsellor. “But all loans are linked to the repo rate and any repo-rate changes will affect the prime lending rate and therefore the amount you’re paying on your loans.

“Those with multiple loan accounts such as overdrafts, clothing accounts and credit cards will feel the direct impact of increases in monthly instalments for all these accounts.”

The experts are unanimous: if you want to buy anything, rather save for it. See How to deal with it, below.

Making investors happy

Investors favour economically stable countries where their savings get higher interest, which is another reason for this particular hike.

Of course it’s not only foreign investors who are happy their investments will now yield higher amounts – anyone who has an interest-bearing savings account will benefit.

“It’s a positive development for many people who are dependent on interest income for their bread and butter,” Dave Mohr, chief investment strategist at Old Mutual Wealth, says. “Scores of pensioners are living on the interest they get on their savings and they’ll now be getting a little more.”

Those who are trying to save should see this as a positive. It’s an “indication the Reserve Bank is prepared to combat the inflation that’s eating away at your savings”, Bart Stemmet of NKC Independent Economists told YOU after last year's hike.

How to deal with it

If it’s too late and you’re in financial trouble because of interest rate hikes, making small adjustments won’t bring much relief, John Loos, FNB household and property sector strategist. But making radical changes could return you to financial freedom.

This includes downscaling to a home half the size and value of your current house and getting a car that costs significantly less to run and maintain.

“Middle- and upper income South Africans don’t want to be seen by the Khumalos next door to be downscaling on their cars and houses”, but they don’t fully appreciate that these can be the biggest burdens by far in terms of our debt levels and overall financial commitments.

To fix or not to fix?

Consider it seriously if your bank’s fixed-rate offer is one percent above prime. “But if it’s more than one percent you have to think about it carefully,” says investment strategist Dave Mohr.

Fixing your rate is a solution, especially if “your finances are balanced on a knife edge and you can’t afford big rate increases”.

Even if you’re paying a bit more by fixing the rate (it’s usually higher than a rate that can vary) you’ll be reducing the risk of falling behind in your repayments.

  • Try to save for a deposit instead of opting for a 100 percent home loan, says Tommy Nel of FNB Home Loans. Even a 10 percent deposit can result in an interest- rate reduction of up to 0,7 percentage points, he says.
  • Close some of your retail accounts (they have some of the highest interest rates) and try to buy everything cash, says economist Vuledzani Ndou.
  • Save instead of borrowing, so you can “be on the right side of the fence” in terms of interest rates, economist Bart Stemmet stresses. “In  short, live within your means.”

Know your terms

What influences inflation? It’s a complicated set of factors that include the rand’s strength against foreign currencies (if it weakens

it’s bad for consumers and interest rates might need to increase); the international oil price and the strength of other economies (if the US increases rates and investors want to go there or if China’s economy slows down, resulting in less money coming into SA, it impacts on our economy).

What’s this upward cycle about? Interest rates follow cycles – sometimes there are many increases in a specific period, then a series of decreases for a specific period. ”

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