JULY INTEREST RATE HIKE!

This afternoon we had another hike in the repo rate of 0,75%. This will push the prime overdraft lending rate to 9% which would increase the monthly instalment on a bond of R2 000 000 over a 20-year term by approx. R953 per month.

To put this in perspective, we need to remember that as recently as July of 2019 the interest rate was 10%.Let's try to demystify what is going on here.

Why does a change in the repo rate result in a change in the prime overdraft rate?

The repo rate is the rate at which the Reserve Bank lends money to the commercial banks. When the rate at which the commercial banks borrow money changes, they pass this on directly to the consumer and the prime overdraft lending rate changes accordingly.

Why are interest rates increasing?

The Reserve Bank has a mandate to keep inflation at targeted levels, and the one tool that it has to do this is by managing the repo rate. Popular economic theory dictates that when inflation is rising the Reserve Bank should increases the repo rate to reduce these borrowings and thereby reduce the money supply to the economy. This then reduces the demand for goods. With lower demand we get a lower rate of price increases, and this curbs inflation.

Our Reserve Bank has set an annual inflation target of between 4 to 6%. According to Stats SA, in June of this year the inflation rate reached a 13-year high, registering at 7,4%. Something had to be done.

We have all seen prices rising across the board, from fuel to food, and this is a worldwide phenomenon caused by the shortages of supply that have resulted from the COVID-19 pandemic and more recently the Russian invasion of Ukraine. Inflation is therefore rising worldwide, and interest rates are also increasing worldwide.

If other countries raise their interest rates, they become a more favourable investment destination for foreign capital. Keeping our interest rates at the same margins vis a vis these foreign countries therefore also protect our country against disinvestment and helps to stabilize our exchange rates.

Based on these factors, it looks probable that interest rates will continue to rise for the foreseeable future.