All about interest rate hikes and how they affect your finances

Almost all consumers are aware that interest rates have been steadily increasing over the past few months, but not all of them always know how it affects their finances.

Just two weeks ago, the repo rate was increased again by 25 basis points, increasing the interest rate to the highest it has been since 2009.

South Africans are not alone. Interest rates have been rising consistently worldwide and it does not look like this trend is going to stop anytime soon, making 2023 a daunting financial prospect for many South Africans.

The most recent interest rate hike of 25 basis points took the repo rate to 7.25% and the prime lending rate to 10.75%.

The 2022 Momentum UNISA Household Financial Wellness Index indicated that households experienced rising consumer price inflation, interest rate hikes and high unemployment, which made achieving financial goals more difficult. Even people who are financially well struggle to meet their goals in these challenging times and need to rethink their money moves.

There is just no getting away from interest rates, as they affect everything from your bond to your savings and investments. But what are they exactly?

“Interest rates depict how much borrowing costs,” says Janine Horn, senior financial adviser at Momentum.

“When the South African Reserve Bank (Sarb) or any central bank in other countries announce an interest rate hike, it determines how much local banks pay when they borrow. Therefore, this influences the rate at which banks will lend money to consumers and the rate at which banks lend to each other.”  

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Why do interest rates keep rising?

Horn says rates are increased at an arguably aggressive rate currently in efforts to control inflation.

“Usually, central banks, such as the Sarb, have an inflation target or an inflation target band. An inflation target is like the sweet spot for inflation and it is important to keep the inflation rate at that level.”

South Africa’s inflation target is between 3% to 6%, but according to Statistics SA, consumer inflation is at a 13-year high of 7.8%, exceeding the target. Horn says interest rate hikes have an adverse effect for people with credit agreements.

“You can expect to pay more on all your credit agreements, including your home loan, loans, credit cards and store credit. However, consider the details of your credit agreements, as some agreements have fixed rates for a set period.”

However, while rate hikes negatively affect consumers with credit agreements, it is good news for people who apply the winning formula by consistently saving and investing.

“People with savings will now earn more on their savings and consumers who diversified investments can expect to benefit from the interest rate hikes as well.”

Horn says these rate hikes will undoubtedly affect your financial plan and goals.

“Interest rate increases and the high inflation rates affect South Africans’ budgets and spending. Therefore, now is the right time to review your financial plan and speak to your financial adviser. Your adviser will provide insightful advice on how to implement sound money habits, aiding your journey to financial success even in these difficult times.”