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The Repo Rate can affect your debt management plan

27 March 2024

What is the repo rate? 

The Repo Rate, or Repurchase Rate, is the interest rate at which the South African Reserve Bank (SARB) lends money to commercial banks. This rate is a pivotal tool in monetary policy, used to control inflation and stabilise the country's economy. When the SARB adjusts the Repo Rate, it influences the cost of borrowing and spending in the economy.  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 consumers spend less money, 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.

How the Repo Rate Affects Debt Management

Changes in the Repo Rate directly impact the interest rates that consumers pay on loans and credit. Here’s how this could affect your debt management plan:

1. Loan Repayment Amounts

An increase in the Repo Rate means higher interest rates on loans and credit facilities. If you have variable-rate debts, such as a home mortgage or personal loan, your monthly repayment amounts could rise, making it more expensive to service your debt.
Conversely, a decrease in the Repo Rate would lower interest rates, reducing the monthly repayment amounts on variable-rate loans, thus easing the financial burden on borrowers.

2. Budgeting and Financial Planning

Fluctuations in the Repo Rate can impact your budgeting. Higher loan costs mean more of your income will go towards repaying debt, potentially cutting into your savings or funds allocated for other expenses.
Effective debt management requires adjusting your budget to accommodate these changes in repayment amounts, ensuring that you can continue to meet all your financial obligations.

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3. Refinancing Opportunities

Changes in the Repo Rate can create opportunities to refinance debt at more favorable interest rates. If the Repo Rate drops, locking in a lower interest rate on long-term loans can result in significant savings over the life of the loan.

4. Debt Consolidation Decisions

The Repo Rate can influence the decision to consolidate debt. During periods of lower interest rates, consolidating various debts into a single loan with a lower rate can reduce total monthly payments and help manage debt more effectively.

5. Investment and Savings

The Repo Rate also influences the interest earnings on savings accounts and investments. A higher rate might encourage saving as returns on savings accounts and fixed-income investments increase, while a lower rate might make borrowing more attractive.

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.

The weakening 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.

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