Important Update: South African Reserve Bank Repo Rate Increase

With the recent Repo Rate hike, borrowing costs have been brought to their highest level since May 2009. We understand that this news may cause some concerns, but let’s take a moment to gain some perspective.

“In difficult times, it’s important to remember that we have overcome challenges before. During the financial crisis of 2008, the Repo Rate was over 11% and much higher than the current increase relating up to 8.25%. So, don’t be disheartened. History has shown that after sharp rises, we witness declines and this gives us hope and something to look forward to,” highlights Wikus Olivier, Managing Director at CreditSmart Financial Services.

Understanding the reason for the increase:

The South African Reserve Bank has raised the Repo Rate for a specific reason. The aim is to control inflation by influencing how much people spend. When interest rates go up, people value their money more and tend to buy fewer things. It’s all about managing the balance between supply and demand.

Let’s break it down: When there are plenty of goods and services available, they are generally cheaper. The Reserve Bank wants consumers to buy these goods and services. But when the demand for a particular item or service increases, it becomes scarce, and that in turn increases its perceived value. People are willing to pay more for it, at an increased price, because there’s less of it available.

So, how does this affect inflation? Well, when things become more expensive, overall prices start to rise, causing inflation. The Reserve Bank made the decision yesterday due to South Africans spending money too easily and because it is so easy to get more money by taking on additional debt. The goal is to encourage people to think twice before borrowing money and avoid spending on unnecessary luxury items or non-essential consumables, which could lead to more debt.

As people start to think twice about their purchases, the demand for these services or goods will decrease. And as demand decreases, prices will go down too, which will have a positive impact on inflation.

By managing how much consumers spend, the Reserve Bank hopes to create a more balanced and stable economy. It’s a way to encourage responsible spending and reduce unnecessary debt, ultimately leading to lower inflation levels.

What can you, the consumer, do?

1. Prioritise your expenditure: Cut back on unnecessary expenses and luxuries. Be mindful of your spending during this period and ‘stick it out’.
2. Review your credit facilities: Explore options to move expensive facilities like credit cards to more affordable ones, such as an overdraft, for example.
3. Review your insurance policies: Request new quotations for your insurance to potentially find better deals that will save you money.
4. Avoid taking on more debt: Don’t apply for extra credit just because you are feeling the pinch. And, if you’re struggling with severe debt, seek a sustainable and regulated solution to alleviate the burden.
5. Reduce debt or boost income: Analyse your expenditures and eliminate anything unnecessary. Additionally, consider diversifying your income through freelancing or part-time work alongside your primary job.
6. Embrace financial education: Educate yourself on personal finance matters. Learn about budgeting, saving, and investing. Knowledge is power in navigating challenging economic times.

Remember, tough times don’t last, but resilient people do! Let’s support one another, stay positive, and work towards building a better financial future.