What Is a Repo Rate and Why Should I Care?

By The National Debt Review Center

One of the most important terms in the South African financial world is “Repo Rate.” The repo rate tells you what the SA Reserve Bank will charge on money lent to it by a commercial bank. That is, when a commercial bank lends money to the SA Reserve Bank for longer than three months and takes possession of securities or other assets as collateral, it’s called a repurchase or repo agreement.

What is a Repo Rate?

A repo rate is the interest rate charged by a bank for borrowing money from another financial institution. This is also known as the repurchase rate. The repo rate is used by central banks to influence the country’s monetary policy. A higher repo rate means that it will be more expensive for banks to borrow money, which in turn will slow down the economy. A lower repo rate means that it will be less expensive for banks to borrow money, which will help to boost the economy.

What does it mean for a South African?

When the South African Reserve Bank raises the repo rate, it becomes more expensive for banks to borrow money from the Reserve Bank. This means that banks will likely raise their interest rates for consumers in order to cover the cost of borrowing. As a result, consumers will have to pay more interest on their loans and lines of credit. The higher repo rate also makes it more expensive for businesses to borrow money, which can lead to higher prices for goods and services.

How does a Repo Rate work in South Africa?

In South Africa, the repo rate is the interest rate at which the central bank (the Reserve Bank) lends money to commercial banks. This rate is used by banks to determine their own interest rates for things like credit cards and home loans.

When the Reserve Bank wants to encourage economic growth, it will lower the repo rate. This makes it cheaper for banks to borrow money, which in turn means that they can offer cheaper loans to consumers.

The opposite is true when the Reserve Bank wants to slow down economic growth. In this case, it will raise the repo rate, making it more expensive for banks to borrow money and therefore resulting in higher interest rates for consumers.

Does the repo rate have to do with inflation and interest rates?

Yes, the repo rate has a direct correlation with inflation and interest rates. When the repo rate is increased, it signals to banks that they should lend less money. This in turn reduces the amount of money in circulation and helps to control inflation. Higher interest rates also make it more expensive for borrowers, which can help to slow down an economy that is growing too quickly.

4 Things you should know about the repo rate:

1. The prime lending rate will always be higher than the repo rate;
   The repo rate is the rate at which the South African Reserve Bank lends to commercial banks. Banks lend at a rate that is a little higher than the repo rate, to cover their basic profit margin. This is known as the prime lending rate.
2. The repo rate affects your home loan:
   As mentioned, the repo rate affects the prime interest rate, which in turn affects the interest rate of your home loan. The interest rate is what you have to pay over and above the amount you pay monthly to the bank in order to repay your home loan.
3. How long will the repo rate remain at the current level?
   FNB predicts further hikes for 2022, with each hike bringing the repo rate up a further 0.25%.
4. A fixed-rate home loan remains at the same interest rate regardless of the repo rate (for an agreed-upon period)
   When your bond is registered, you can choose to have a fixed-rate or variable-rate loan.

Under a fixed-rate home loan, you keep paying the same home loan repayment amount monthly, regardless of fluctuations in the market, for an initial agreed period.

However, fixed interest rates expire after the initial agreed period, after which you will either have to revert to variable interest rates, or negotiate a new fixed rate with the bank.

Furthermore, it’s more of a risk for the bank, so they’re likely to charge you a higher rate out the gate.

But it does enable you to budget with greater accuracy.

Source: Ooba

Conclusion

The repo rate is an important tool that the Reserve Bank of South Africa uses to control inflation and the money supply in the economy. By understanding how the repo rate works, you can make more informed decisions about your finances and better understand how economic policy affects you