The interest rate increase by 50 basis points will cause many South Africans, already stretched by cost-of-living increases, to stretch their monthly budget even further.
At first glance a 0.50% increase in the repo rate, the interest rate at which the central bank lends money to the country’s commercial banks, may not seem like a lot, but it indicates that the Reserve Bank is worried about inflation as prices of goods and services rise, fuelled in part by escalating energy costs and a depreciating currency.
“Simply put, inflation means that the money in your wallet is worth less. By increasing interest rates the Reserve Bank is trying to reduce spending and limit inflation to between 3% and 6%. The problem is that this also makes it more expensive to borrow money, which can limit economic growth,” explains Marlies Kappers, head of marketing at Direct Axis.
This may seem that it has little to do with ordinary South Africans, but it does have a very real effect on householders trying to make ends meet.
After the interest rate announcement the major banks announced they would increase their prime rates by the same margin. This means that if you’ve borrowed money at prime rates you’ll be paying 50 cents more a month on every R100 you owe.
If this was the only factor affecting household budgets, many would cope. Bear in mind, however, that if you have a bond, not only has the cost of owning your house increased, but so has the cost of living in it as electricity costs have also risen.
If you rent, it’s likely that your landlord will raise the rental when you renew your lease to cover the new mortgage costs.
The same applies to your car. If it’s financed you’ll be paying more on the monthly instalments.
Although there’s not a lot ordinary South Africans can do about macro-economic issues there are some steps they can take to limit the effects of rising interest rates and other costs. These include:
- Ruthlessly cut out non-essential spending and use the savings to pay off short-term debts, starting with those that attract the highest interest rates;
- Keep track of monthly expenses to see where you may be able to save. For example you may discover you have duplicate insurance cover or by shopping around are able to get better premiums;
- Consider consolidating debts. This involves lumping all your debt together and getting a single loan to repay all of it. Doing this makes managing your income and expenditure simpler and because the interest rate is fixed, it’s easier to budget. Spreading repayments over a longer term also usually reduces the monthly instalments;
- Set a monthly budget. First cover essential fixed expenses such as a home loan, rent or car repayments, then provide for variable expenses such as electricity, food and ‘phone costs.
- Try to save a little each month. Keep this in an accessible account to cover unexpected expenses such as car repairs.
“It’s worth remembering that increasing interest rates is a double-edged sword. You pay more on any money you owe, but you also earn more on any money you save,” says Marlies.
