The repurchase rate (repo rate) was reduced numerous times by the South African Reserve Bank (SARB) in 2020. In 2019 the repo rate was between 6.5 – 6.8%, and had been largely in this range in the 3 years preceding this period. It is currently sitting at 3.5%

With the onset of the pandemic, the SARB had to step in and take drastic action. The SARB’s Monetary Policy Committee (MPC) is the party that votes to make interest rate decisions for the SARB.

What is the repo rate and how does it work?

The repurchase rate or repo rate is effectively the rate at which the central bank lends money to commercial banks. The SARB would lend money to say ABSA Bank at the repo rate, which ABSA would then lend out to its clients.

The lower the repo rate, the lower the interest that consumers would pay their banks on loans. Many loans are linked to the prime rate, which is linked to the repo rate. Essentially, it is the rate at which most interest rates are derived from.

Repo rate drop in 2020

Between March and July of 2020, the repo rate decreased down to 3.5%. This was the lowest the repo rate had been since 1998. This drop was in response to the negative effects that Covid-19 was having on the South African economy.

A lower repo rate has an immediate impact on those borrowers who have debt, as their monthly repayments will reduce. This frees up cash in their budgets for living expenses and other costs or savings.

Future increase expected

As the economy slowly recovers and certain indicators are looking more positive compared to a year ago, interest rate hikes are on the horizon. Although the exact amounts and dates are not certain the SARB has released the probable future movements, as can be seen in the chart below.

Increase in repo rate will make debt more expensive for consumers

Even though consumers have been reaping the benefits of lower debt repayments when the rate was reduced, the relief will come to an end when these start increasing again. The trouble is that consumers have possibly become reliant on the extra funds in their budgets. When these start hiking, they may be more likely to default.

Financially stressed consumers will have to seek debt solutions and repayment options to get repayments under control again. Making sure that household incomes can cover living expenses and debt repayments is vital to the financial health of the family.

What options are there for consumers who cannot afford high debt repayments?

If debt repayments become too high, this can put consumers into stressful situations. Not being able to afford debt and living expenses could cause a debt cycle. Using debt to pay off other debts is a dangerous game.

Consumers in this position are usually looking for lower debt repayments. This can be achieved by using a debt consolidation loan or a more formal solution such a debt counselling.

Consolidation loans are better suited to consumers who are still in good financial standing, but want to pay a lower amount over a longer term. Debt counselling is for over-indebted consumers who need a much lower installment and lower interest rates.

{Source: Bloomberg}