Savings: The upside of rising interest rates

The pig has symbolised savings for centuries, thanks to the famous piggy bank. (Photo: Shutterstock).
The pig has symbolised savings for centuries, thanks to the famous piggy bank. (Photo: Shutterstock).

Johannesburg – An important factor that is often overlooked after an interest rate hike is the opportunity to promote South Africa’s savings culture during an upward rate cycle, Elize Giese, head of investments at FNB Business, said on Monday.  

The SA Reserve Bank (Sarb) announced an increase of 25 basis points in the repo rate amid continued fears about the upside risks to inflation and expectations, wages and the rand.

Where most analysts warned that rising interest rates would drive up debt repayments and debt-service costs, affecting household and business finances, consumer and business confidence, Giese said South Africa should maximise every possibility to build a savings culture.

She said during the launch of the 2015 Savings Month at the beginning of July, the Ministry of Finance highlighted that South Africa’s aggregate saving has been on a declining trend because of the decline in corporate and household savings.

Savings by the corporate sector represent the bulk of total saving, but the corporate savings ratio has fallen in net terms from 6.6% of the gross domestic product (GDP) in the 1980s, to 5.6% in the 1990s and to only 3% between 2000 and 2008.

Giese pointed out that every decision on interest rates results in conflicting views. A rate hike is regularly met with criticism by those who are concerned about debt management, while a reduction equally faces disapproval by those who monitor the local currency and inflation.

"But the message of savings and investments is equally important to small as well as big businesses, as they need to mitigate the persisting uncertainty of the local or global economy," she said.

READ: How repo rate increase will affect you - as it happened

The state of the local and global economy has never been the same since the global economic recession of 2008. It is, therefore, important for businesses, big or small, to save or invest some money and earn interest in anticipation of a rainy day.

"More importantly, a savings or an investment plan could negate the need to secure a business loan for short-term financial constraints. Businesses which have already started saving are likely to reap better returns over the course of the year as economists are predicting an upward rate cycle in the short-term,” said Giese.

In her view the need to build a culture of saving is not only necessary to the country’s economic wellbeing.

"It can make a significant difference to business sustainability. Over the last decade, banks have introduced a number of savings and investment plans which offer great returns to clients who are committed to saving," said Giese.

"It is important for individuals and businesses to start making use of the available opportunities and fully embrace a culture of saving."

ALSO READ: Saving is not an afterthought

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