The South African Reserve Bank (SARB) has confirmed that the interest rate will be set at 6.75% for Mzansi on Thursday afternoon – a hike of 0.25%. Their decision is set to have a large impact on the economy – as well as the rand value – as their announcement coincides with a cabinet reshuffle.
Two months ago, SARB gave serious consideration to implementing the 6.75% rate. But after executives narrowly decided against the motion (by four votes to three), everything remained in place. So, is a rate increase good news for South Africa, or yet another harbinger of doom for our economy? Here’s what you need to know:
The main reason interest rate hikes are implemented is to stimulate an improvement from a country’s currency. The rand, famous for its volatility, would strengthen against the global markets if SARB decides to push up their rates.
With interest rates going up, it means there’s “more in it” for the banks. People will have to pay more to square whatever loans they take out, so these institutions are therefore more likely to give leeway to first-time house buyers and loanees with lofty ambitions.
If you’ve already got money stored away, an interest rate increase is in your best… erm… interests. The higher it rises, the more money your savings are making while they remain untouched.
The negatives of higher interest rates have the potential to outweigh the positives, though. We’ve got a vicious cycle where banks may be more inclined to loan money, but because it will cost more to pay it back, it can put consumers off when it comes to taking the plunge.
The rates are inextricably tied to mortgages. If it goes up by just the 0.25% that’s already being touted, a mortgage of R2 million could cost homeowners another R5 000 on their repayments. With this extra expenditure on the table, homeowners are forced to conserve their money en-masse, which affects the economy.
If it costs more to invest in South Africa, then the economy is going to suffer in this regard, too. Businesses are less likely to take chances with their investments and consumers will be more cautious with their own purchases.
Finally, one of the most keenly-felt impacts of an interest rate hike is the toll it takes on credit card payments. These increases usually see financial institution push their own prime rates up, meaning you’ll have to pay back more on credit than you would have done in the first place.