The Reserve Bank of South Africa (SARB) recently announced that the Monetary Policy Committee (MPC) had decided to raise the repo rate by 50 basis points, to 4.75% with effect from the 20th of May 2022. This is a departure (though not shocking) from a trend that the market had got accustomed to, where the rate mostly fluctuated on a quarter point basis.
The repo rate is the rate of interest at which banks borrow money from the Reserve Bank, whilst the Prime Lending Rate is the rate of interest at which banks lend credit to consumers. The relationship between the Repo Rate and the Prime Lending Rate is one of direct proportion, as a rise in the Repo Rate will result in a higher Prime Lending Rate due to lenders factoring in a share to recoup the cost of borrowing from the SARB.
In its statement (SARB) a number of factors were advanced for the hike, chief amongst them being to contain inflation caused by the effects of an ongoing conflict halfway across the world. It is undeniable that the Russia-Ukraine conflict has had a huge impact on world economies which are still reeling from the effects of the Covid-19 pandemic, driving inflation in the process. The rising food and fuel prices can be traced back to the conflict which has, together with the pandemic, disrupted the global supply chain.
The conflict in Ukraine might still linger on for most of 2022 and possibly into 2023, which is not a comfort even for the modest optimist. In fact, many economic analysts wish they carried news of hope. It is predicted that the rise in interest rates shall continue in the second half of the year and in the years of the nearest future.
It is however important to note that South Africa’s situation is not isolated, as bigger economies across the world are facing the same perils and the measures being taken are not dissimilar. India, an influential Asian economic powerhouse raised its rate by 40 basis points recently, with the United Kingdom raising the rate by 40 basis points. In the far west, the United States Federal Reserve raised the rate by 50 basis points, which had never been seen in over two decades.
Economic growth for 2022 was also revised down for South Africa from 2 percent to 1.7 percent, with the KZN floods and the electricity woes being central, not least in the situation already burdened by a conflict driven inflation spiral. In actual effect, the increases in the lending rates in most of the countries is attendant to the Ukraine conflict, putting paid to the major impact it has had in the immediate and of course, the larger scheme of things.
This is certainly not the news that the average consumer on the street would be happy to hear, and it calls for personal strategies to contain the situation, whose effects are far-reaching.
For home buyers, it calls for careful analysis, tough decisions and comparison on whether a fixed interest rate or a variable one will be best under the circumstances, especially putting into consideration the economic predictions as alluded to above. Of course, the circumstances of one credit consumer are not similar to the next, hence it pays off to look into each one’s with careful and honest introspection. This is important in so many ways, it affects one’s ability to honour their obligations towards bond repayments on one hand, and whether or not a few pennies will be retained in the pocket, on the other.
As crippled economic growth runs its course, amidst predictions of doom in relation to rising interest rates, it is not without wisdom to tighten the seat belt and prepare for sailing on disturbed waters.
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