How the repo rate affects your pocket


What’s important here is to learn how you’re affected, and how to turn this to your advantage.

Responsibilities of the Reserve Bank

Before getting to grips with what the repo rate is, let’s understand where money comes from. And, no, it doesn’t grow on trees.

Where it does come from is complex systems run by the South African Reserve Bank (SARB). For the purposes of this explanation, we’ll focus on 2 aspects of SARB's responsibilities: lending money to the commercial banks, and keeping inflation in check.

As we’ve already identified, inflation is the measure of how much more something costs this month than it did last month, or last year.

SARB is crucial to keeping South Africa’s cost of living affordable to all

So, if a widget cost R100 last year January and it costs R110 this year, then the price inflation for that product is 10%. Being able to respond to inflation, by increasing or lowering the repo rate, makes SARB crucial to keeping South Africa’s cost of living affordable to all.

For now, it’s important to know that lower inflation means price increases are kept in check.

What happens if prices and inflation climb too high is that people stop buying, which slows down the economy. Which is why SARB is also concerned with keeping the economy ticking over.

It does this by adjusting the repo rate so that South Africans have access to affordable credit that allows them to buy what they need responsibly.

When prices and inflation do start climbing, it can then raise the repo rate to slow spending.


The repo rate is a useful lever

The Covid pandemic is the perfect example of how SARB lowered the repo rate to make sure families have more take-home pay.

Lower monthly debt repayments mean that millions of South Africans have had that little bit extra on hand.

This shows SARB's ability to remotely influence the wellbeing of every household in the country.

It does this by adjusting the repo rate, which is the name given to the interest rate SARB charges commercial banks.

What the banks then do is add their ‘markup’ to this rate. This is called their prime rate, or lending rate. It’s used to calculate the interest you pay on credit, and earn on savings.

In most cases, the interest rate you pay or receive fluctuates in tandem with the repo rate. So, if the Reserve Bank wants to curb inflation, it may raise the repo rate. This means you’ll pay more on your credit card or overdraft.

But your personal loan repayments wouldn’t be affected, because personal loans are offered with a fixed interest rate.

In all other cases, your wallet will be a little thicker or thinner at the beginning of the month depending on what’s happening with interest rates.

The best way to know whether rates are moving up or down is to keep an eye on the Reserve Bank. It meets every second month of the year from January to assess the economy and whether it needs to step in by changing the repo rate. 

Making the repo rate work for you

The other reason to keep an eye on the repo rate is if you have any savings accounts. Because the prime rate is linked to the repo rate, the interest you earn will also rise and fall based on what the Reserve Bank decides.

This means that if you’re saving towards a goal by a certain date, you’ll either have to increase your contributions, or save for a while longer. Unless, of course, you have a fixed-interest savings account.

As you will have noticed, we can do nothing but adapt and adjust to what happens with interest rates. And now that you have a better appreciation for what the repo rate does, maybe you can make more informed decisions about managing your money.