The Repo Rate can affect your debt management plan

21 March 2016

What is the repo rate?

The repo rate is the base interest rate that the Reserve Bank charges to commercial banks when they borrow money. In order to control inflation, the Reserve Bank sets the level of the repo rate to influence the interest rates that Banks pass on to their customers. An increase in the Repo rate helps to control and prevent an excessive growth in bank lending, which in turn controls inflation.

How does the repo rate control inflation?

Increasing the repo rate causes the Banks to increase their lending rates to consumers. When lending rates are higher, the demand on money by consumers drops. This drop in demand results in less money being spent. As soon as less money is spent by consumers, the price of goods comes under pressure and price increases are minimised.

The opposite can be true too. If the Reserve Bank wants to stimulate growth, they can reduce the repo rate, which reduces the price of lending, increases the demand for money and increases consumer spending.

What does a weaker Rand mean for you?

A weaker Rand means that South Africa is paying more for imported goods. These goods include staple foods such as maize and other essentials like petrol and clothing to name but a few. These price increases are passed onto the consumer, resulting in inflation. A weaker Rand doesn’t only impact the consumer, it also impacts Government. The costs involved in financing infrastructure projects increases and limits Governments ability to invest in these initiatives. This in turn slows the growth of job creation. On the other hand, a weaker rand makes South African exports more globally competitive.

If the Rand is weak and the repo rate increases, what should you do?

Now is not the time for excessive spending or taking on new debt. We find that far too many South African households don’t have a budget, have never seen their credit report and have no means for tracking their monthly expenses or managing their cash flow. Our advice to you at this time is to get all of this in place, if you haven’t already, and to track your expenses very carefully.

A repo rate increase could mean increases in debt repayments (unless you have a fixed rate with your bank) and the weakening rand means prices are going up. It is vital for you to take control of your personal finances right away and to start adopting responsible habits with your money.