Interest Rates and You

“Interest rates are prices for loanable funds or prices of funds invested lent out or borrowed for various periods of time”

What are interest rates? Very often we hear economists talking about them, but what do they mean in your life? It is important for ordinary citizens to have an understanding of what this rate relates to and how changes in the interest rate affect your life.

According to the Reserve Bank, “Interest rates are prices for loanable funds or prices of funds invested, lent out or borrowed for various periods of time. The supplier or lender of funds normally wants to earn an income and the user or borrower will generally be prepared to pay for the right to use the accumulated funds”.

The Reserve Bank Governor and the panel who sit on the Monetary Policy Committee (MPC) have the mandate to set the repurchase or repo rate. The repo rate is the interest rate at which the Reserve Bank lends money to private banks. The repo rate also serves as a yardstick for short-terms interest rates. Therefore if the repo rate increases, banks have to pay more for repo funds and raise their interest rates.

When interest rates are raised it can have a major impact on the amount of disposable income you and your family have. For example interest rate increases since June 2006 have caused a 24,6% average monthly repayment increase on mortgage loans. In practical terms, on a R500 000 home loan over a 20-year period, the monthly repayment increased from R4 992 in mid 2006 to about R6 218 in October 2007.

Therefore it is important to keep in mind that if interest rates go up so will your bond repayment and you need to have enough financial flexibility to accommodate such increases. This increase in instalments due to augmented interest rates also applies to vehicle finance, credit card debt, person loans and other forms of credit.

Therefore it is important that consumers do not use credit to fund lifestyles that are beyond their means. On the other hand, if you are a strong saver, as interest rates rise it will put more money in your pocket or your savings account. Many consumers are of the view that South African interest rates are higher than in other countries. On the contrary, our interest rates are not considerably higher in relation to most developing countries. So what can you do to contribute towards lower interest rates? Very simply, save more and spend less.

Key Dates of the Reserve Bank

Monetary Policy Committee Meetings
30 & 31 January 2008
 09 & 10 April 2008
11 & 12 June 2008
13 & 14 August 2008
08 & 09 October 2008
10 & 11 December 2008

*Used with permission from Consumer Fair November – December 2007 edition (Published by the National Consumer Forum)

Background information sourced from the Reserve Bank.