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29 January 2015
What is the repo rate?
In South Africa, the only supplier of money is the South African Reserve Bank (SARB). This means for general banks to have enough money available for the general public at all times, banks have to borrow money from the SARB as a last resort when the interbank market no longer has enough funds for interbank lending.
According to the SARB, the interest rate at which banks borrow money from the SARB is called the “repurchase rate” in short repo rate. In order for banks to make a profit from the money borrowed they put their general interest rate higher than the repo rate, which is their lending interest rate. This means that changes in the repo rate will affect people who have mortgages and borrowed money from banks.
What is the current repo rate and what affects changes to the repo rate?
The repo rate can be used to stabilize inflation levels by determining the amount of money in people’s hands. That is if the supply of money is greater than the demand for money then the adjustment to equilibrium would result to inflation, since prices for goods would then increase so that the amount of money demanded for use increases to meet the amount of money supplied.
How does this affect loan repayments and home loans?
A change in the repo rate leads to a corresponding change in the interest rates, meaning an increase in the repo rate will increase the interest rates and vice versa. This change results to a change in amounts lent to consumers, meaning a change in repo rate leads to a change in the future value of the principal loaned amount, as well as the monthly instalments paid on the amount of money owing.
Understanding the repo rate and what affects repo rate change is important for people buying goods on credit, as this has an effect on future bank lending rates. This will give a consumer an indication of the pros and cons of using credit at any given time. This knowledge will help in preparing for your repayment strategy for any loans or mortgages acquired, in order help in adjusting budgets and spending patterns.
For example if the repo rate stays constant but the state of the economy seemingly being prone to inflation; the repo rate is likely to take an upward trajectory. In this instance making adjustments to monthly budgets and paying extra on mortgages instalments would help to pay more towards interest, thus ensuring that when interest rates increase the effect won’t be as great. This is because a rise in the repo rate makes it more expensive to use a lot of credit.
Author: Geoff Nyamakanga (DebtBusters Financial Consultant)