Repo rate: Fasten purse strings and prepare for bumpy ride

With galloping inflation, the debate among economists is by how much will the Reserve Bank’s monetary policy committee (MPC) increase the repo rate on Thursday.

The Reserve Bank uses the repo rate to bring inflation under control, and its targeted range is between 3% and 6%.

South Africa is not alone in a fight to curb rising inflation.

This week, the Swiss National Bank, US Federal Reserve and the Bank of England lifted rates to put the brakes on rampaging inflation.

The South African repo rate has increased by 3.75 percentage points over the past year-and-a-half, owing to efforts by the central bank’s MPC to combat inflation, which Statistics South Africa said this week had breached the target and reached 7%.

The repo rate is currently standing at 7.25%. The prime rate, which is the interest rate charged by commercial banks to customers and is directly related to the repo rate, is currently at 10.75%.

How do all these repo rate increases affect the man and woman on the street?

It is bad news for consumers who have car and bond repayments, as commercial banks are expected to also increase interest rates.

Those of you who have personal loans, credit cards and retail accounts are in for a rougher ride, as minimum repayment amounts are likely to go up.

This makes the situation highly toxic for under-pressure consumers who have had to contend with rising fuel prices, sky-high food prices and shrinking salaries.

Simphiwe Letlojane, an investment strategist at Absa investments, stockbrokers and portfolio management, urges embattled consumers to speak to their financial advisers, do a needs analysis looking at both current and future needs, check their insurance, savings, investments and banking requirements and stick to a budget in these tough times.

“Anyone linked to a variable interest rate would have their interest expense increase, thus reducing their disposable income. This would be proportionate to both the rate change by the Reserve Bank and the outstanding loan amounts.

“Clients who are struggling to make payments are encouraged to reach out to their bank and to speak to a financial adviser to avoid default,” urges Letlojane.

In terms of the outlook for interest rates, Letlojane says a Reuters’ poll consensus expectations are for a rate hike of 25 basis points increase by the MPC next week, aligned to the Absa house view.

“Eighteen out of 20 surveyed analysts are anticipating 25 basis points in hikes, while the remaining two analysts are forecasting no change.

“The guidance by the MPC in its last meeting was that interest rates are likely to have peaked at current levels, when looking at its internal models, which serve as a guide for policy, indicating no further hikes from current levels.”

This is a cue for long-suffering South African consumers to tighten their purse strings, grit their teeth and hang on for a bumpy ride.

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