A week ago the South African Reserve Bank (SARB) sliced its key repo rate by 50 basis points (BPS) to 3.75% during its May meeting. This follows a 100 BPS rate cut in April meeting, carrying borrowing expenses to its most reduced level on record, and of which this can be clarified by the coronavirus pandemic.
This will immediately affect the common consumer in South Africa and additionally show the South Africans how to get an edge on your saving, spending and borrowing strategies when rates fall. You may not understand it, yet behind the scenes the Reserve Bank is discreetly impacting your regular day to day existence with regards to borrowing, saving and even spending.
The SARB is answerable for dealing with the nation’s monetary policy. A major aspect of its responsibilities is altering the repo rate—the short-term interest rate banks charge each other to loan supports overnight.
The SARB chooses whether or not to raise or lower this benchmark interest rate so as to arrive at most targeted employment and stable inflation in the South African Economy.
So how does an adjustment in interest rate influence your choice to spend or save, you inquire? To get from a mainstream saying: “So goes the repo rate, so goes consumer interest rates. Whether it goes up or down, a change to the repo rate could have an expanding influence a similar way for borrowers, savers and spenders—a significant evidence point for why the repo rate matters for consumers.
On the off chance that this is a surprising bit of information to you and the repo rate hasn’t generally been on your radar, have no dread. The ongoing interest cuts make borrowing increasingly appealing. This can be exceptionally useful in low-rate conditions on the off chance that you have an obligation or are searching for new borrowing chances.
The way things are, borrowing cash will in general become more affordable since banks and moneylenders additionally commonly lower rates on their credit items like Credit cards, Personal advances, Home loan credit extensions to make reference to a couple.
Least interest charges
Why the repo rate matters for consumers and the Mastercards in your wallet has to do with the least installments and interest charges. A cut in rate could mean a lower least installment on Visas and a lower cost to convey a parity starting with one month then onto the next.
For those with advances, a rate cut could mean lower regularly scheduled installments and less interest paid out over the life of the credit. Lower borrowing costs can add money back to your budget that you could use to spend, save or apply to your financial goal of choice.
How does the Federal Reserve interest rate influence me with regards to homeownership, you ask? There’s good news there, too. When the rate goes low, homeowners with an adjustable-rate mortgage or homebuyers shopping for one may experience a rate reduction, since the rates for this type of mortgage typically track with the prime rate, which is in turn influenced by the repo rate.
The lower your mortgage rate, the lower your monthly payment and the more home you might be able to afford. Good deal. But also note that those fixed-rate mortgages are less directly impacted by a SARB rate cut.
I would say when rates are falling, it may be a good time to consider refinancing or consolidating existing debt, such as private student loans, home loans and car loans. When analyzing “how does the interest rate affect you as a consumer,” one should be mindful of how much rates have dropped to determine the value of refinancing or consolidating.
Using mortgages as an example: A consumer should not consider refinancing a mortgage after a 50 basis point (0.50%) cut in the rates because the associated costs and fees will outweigh any interest savings.
If rates move meaningfully lower, they should be on the lookout for refinancing offers, assuming they have significant time remaining on their mortgage and can benefit from lower interest costs.