For anyone planning to borrow money in South Africa, understanding the repo rate is crucial. The repo rate, determined by the South African Reserve Bank (SARB), influences the country's interest rates, particularly the prime lending rate. Whether you're applying for a home loan, vehicle finance, or personal credit, the repo rate directly impacts how much you will pay back on your loan. Let's explore why understanding it is essential and how it affects the prime lending rate.
The repo rate in SA is the interest rate at which the South African Reserve Bank (The SARB) lends money to commercial banks such as Standard Bank, FNB or Absa for example.
When the SARB adjusts the repo rate, it influences the interest rates that banks charge consumers for borrowing money. A lower repo rate means banks can borrow at cheaper rates, passing those savings onto consumers in the form of lower interest rates. This means that your home loan, because of the repo rate, will have a lower interest rate, saving you money on your monthly instalment. The opposite is also true: when the repo rate is increased, it becomes more expensive for consumers to borrow money.
The South African Reserve Bank adjusts the repo rate based on economic conditions, using it as a tool to either stimulate growth or curb inflation. These decisions are made by the Monetary Policy Committee (MPC), which meets several times a year to review economic indicators and decide on the appropriate rate.
The prime lending rate is the benchmark interest rate that commercial banks offer to their most creditworthy customers. It is directly influenced by the repo rate. When the repo rate changes, the prime lending rate typically follows. For example, if the SARB decreases the repo rate by 25 basis points (or 0.25%) as it recently did, commercial banks are likely to lower their prime lending rate by a similar margin.
For most consumers in South Africa, interest rates on loans are pegged to the prime lending rate, either at prime or prime-plus a certain percentage. Therefore, when the prime lending rate decreases, loans become more affordable. Similarly, when the rate increases, the cost of borrowing rises.
During the COVID-19 pandemic, the South African Reserve Bank made several rate decreases to cushion the economic impact on households and businesses. Lower rates helped bring down the prime lending rate, making it easier and cheaper for South Africans to borrow money for things like homes, cars, and business investments. This is why there was such a surge in homes being bought during the pandemic.
The SARB's Monetary Policy Committee (MPC) changes the repo rate so that it can keep the inflation rate under control. As it stands, The SARB is aiming to keep inflation target range between 3%-6%.
Inflation, in general terms, refers to the rise in the cost of products and services.