What does the hike in the repo rate mean for you?

Angelique Ruzicka explains in simple terms what the 50 basis point hike in the repo rate announced by the South African Reserve Bank governor, Gill Marcus, means for you.

Hang on, so what was the rate before and what is it now?

The repo rate has been at an all time low (sitting at 5%) for quite a while now but it looks like this ‘honeymoon period’ is over. Gill Marcus, governor of the South African Reserve Bank (SARB), announced today that the MPC (Monetary Policy Committee) has decided to increase the repurchase rate by 50 basis points to 5,5 per cent per annum as of 30 January 2014.

 

Why are they increasing the repo rate when they’ve kept it on hold for so long up until now?

The SARB gave specific reasons for the hike. Global research firm Nomura says that the SARB now thinks the global crisis has moved more decisively into an exit phase that will have meaningful negative implications for EM (emerging market) currencies, their capital flows and economies. “This is the root of today’s hike, which surprised our original way-earlier-than-consensus May hike call,” it said in a statement.

 

So what does this mean for me?

It means that the cost of borrowing is going to increase. FNB, for instance, has already announced that it is increasing its prime lending rate from 8.5% to 9%. Other banks are likely to follow suit. So if you are a home owner with an outstanding mortgage you are in for an increase in the amount you pay every month. Banks could also increase their charges that they attach to their current and savings accounts. Other loans such as personal and vehicle finance loans may also increase now. However, if you have managed to secure a fixed rate on any of your loans (mortgage, vehicle finance etc) you won’t be affected by this rate change and will continue to carry on paying what you were.

 

Will my wallet be ‘hit hard’?

That depends. A 50 basis point increase shouldn’t hit you too hard, unless you are already in over your head in debt. Let’s say for example that you have a R1 million home loan which currently charges you interest at the prime rate (8.5%). From the end of January, when the rate increases, you will be paying R319 more per month. If you have a R3 million home loan at 8.5% and 50 basis points were attached then you’d be paying R942 more. This can be affordable or it can push you over the edge. It all depends on your financial circumstances

 

Is there any good news?

Yes, the repo rate increase could spell good news for pensioners and savers. A hike in interest rates means that savings will enjoy more interest too.

Will there be more repo rate hikes to follow?

Some analysts certainly think so. It’s rare for rates to increase in isolation according to John Loos, household and property sector strategist at FNB.  Nomura have concurred with this: “We see today’s hike as the start of a 200-250bp hiking cycle that should be completed by the middle of 2015 and now see another two hikes this year, most likely in H2.”

Loos adds: “The reality is that prior interest rate moves have happened in a series, and a rate hike is more often than not part of a cycle rather than a once –off event. It is important to be prepared for this.”

What shall I do now?

It depends on what you have done up until this point. If you’ve been conservative with your spending you should continue with this strategy. But if you’ve got into the habit of spending your hard earned money on frivolous things that you don’t need then you need to revisit your habits. “I’ve for a long time been recommending that consumers plan around the inevitability of interest rate hikes, living well within their means and being able to absorb a few percentage points’ worth of rate hikes. That recommendation remains exactly the same now. Those who have done this shouldn’t have to change much, but those that perhaps haven’t been doing this need to make the necessary adjustments,” advises Loos.

If you are worried that repo rates will increase dramatically then speaking to your loan providers to have your loans fixed is an option. However, this may not be a wise move necessarily. “Fixed interest rates are an option, although once the repo rate starts to rise the fixed rates normally become less attractive, because fixed rates are determined to a large extent by market expectations of future interest rate moves. But fixed rates are not about beating the market. They are about fixing a certain portion of one’s cash flows so as to eliminate interest rate hiking risk,” explains Loos.

He adds: “An alternative to fixing interest rates is to voluntarily set one’s monthly instalment well above the required instalment amount, and then adjust one’s lifestyle in the coming months so as to be able to live within the new limit set by the higher instalment value.”