How the repo rate affects you

The repo rate is defined as the rate in which the central bank of a country being the South African Reserve Bank in our case, lends money to commercial banks like ABSA, FNB, Discovery Bank, just to name a few, in the event of any shortfall of funds. The term “shortfall” means that there is a short availability of funds. Furthermore, it is the amount by which the liability exceeds the required amount of cash that is available.

In essence, the repo rate is a tool used by monetary authorities to control inflation. A question that then comes to mind is how is the repo rate and inflation in sync? The South African Reserve Bank uses the repo rate to limit commercial banks from borrowing money from the central bank which ultimately reduces the money supply in the economy thus arresting inflation.

How the repo rate affects you

Though the repo rate seems to be somehow advantageous as it limits commercial banks from borrowing money thus allowing the government to control the money supply within the economy, it also affects the lives of ordinary people. How does the repo rate affect you? After a lengthy debate by the monetary policy committee of the Central Reserve Bank, a conclusion has been drawn that a 25 basis point increase should transpire.

The repo rate now sits at 7.25% whilst the prime lending rate sits at 10.75%. The Prime Lending Rate is that the cost at which banks are willing to lend money to consumers. The repo rate has a direct impact on the prime lending rate, which is the repo rate plus the amount which the bank adds to ensure sure they make a profit on their loans. The lower the repo rate, the lower the prime interest rate.

The inflation rate which is above 7% is the cause of the increase. As a result, this inevitably affects the consumer. What this means is that if for example, a consumer is paying a mortgage of R2 000 000 over a period of 20 years, he or she will be paying about R337 more. The repo rate is probably one of the most important considerations when it comes to applying for a bond. It affects not only the monthly repayments, but also how much interest will be paid over the entire period of the loan. A drop in the repo rate will mean a lower prime lending rate, and this will decrease the monthly bond payment.

For some consumers, the increase of the repo rate and prime lending rate might not seem like it’s a lot but it actually is considering the current economic status quo which has increased the cost of food, electricity and fuel prices.