WATCH: Interest rates and how they affect you

Interest rates are one of the hot economic topics at the moment, especially since the South African Reserve Bank has hiked the repo rate by 75 basis points for the second time in a row. It is especially bad news for consumers who have a lot of debt, because their debt will now become more expensive along with all the other prices that just keep increasing.

When you explain interest rates, you need to consider two concepts: the repo rate and the prime rate, says Ester Ochse, product head at FNB Integrated Advice. “The repo rate is the rate at which banks can borrow money from the South African Reserve Bank (Sarb). The current repo rate is 6.25%.”

She explains the prime rate is the interest rate that banks charge you for credit products, such as home loans. The current prime rate is 9.75%.

ALSO READ: Reserve Bank likely to slow repo rate hikes, now that we’ve reached pre-pandemic levels

Why are interest rates increasing?

The Sarb, which meets six times a year, uses interest rates to manage inflation, Ochse says. “Inflation is simply how much a weighted basket of goods and services, such as groceries and petrol, goes up from one period to another and the changes are expressed in percentages.”

Since South Africa’s inflation target is between 3% and 6%, the Sarb’s mandate is to maintain this target range. South Africa’s inflation rate is currently 7.6%. This high inflation is due to several issues, but the main one is the rise in oil and agricultural commodity prices, such as wheat and sugar. This means that it costs more to transport goods and produce necessities such as food.

What does this mean for you?

If you have credit, whether it’s secured or unsecured and the interest rate increases, your monthly repayment will increase as well, Ochse says. For example, a R1 million bond repayment will cost about R485 more per month now that the interest rate has gone up by 0.75%. This will unfortunately limit your spending as goods costs more.

ALSO READ: Biggest interest rate hike since 2002 to drain South Africans’ pockets

What can you do?

Ochse gives the following tips to manage the strain of rising interest rates on your pocket:

• Keep track of what you spend and see where your money goes to determine where you can cut back. For instance, you could spend less on take-aways and treats and put that money in your bond or other credit account to pay it off faster and save on interest. Use tools such as the Track your Spend feature on the FNB App.
• Move your credit debit orders as close as possible to your salary payment date to ensure that your debt is paid and you will not have to worry about keeping money aside for the rest of the month.
• Look at other ways to free up cash, such as using your loyalty programmes, such as eBucks, to supplement your necessary expenses such as groceries, fuel and toiletries.
• Food prices increased during the last few months, making it necessary to look for ways to save money on food, such as buying non-perishables once a month and creating a weekly menu from the pantry before buying a few fresh things every week.

ALSO READ: Repo rate increase will hurt consumers with debt, but benefit those with savings

If you have savings

Ochse says the good thing about the interest rate cycle is that if you have savings, such as emergency savings or if you live off the interest from cash investments, the interest on these savings also increases. This means that you will earn more interest and more interest will be paid every month.

She says if you manage to free up cash using these tips or benefit from the increase on interest paid on cash investments, think about using that to pay off any expensive credit you have, saving for an emergency or putting towards your longer-term goals such as retirement savings. Keep track of your budget and spending by using, for example, the FNB Smart Budget on the FNB App.