The repo rate was kept unchanged at 6.75% by the Monetary Policy Committee (MPC) of the South African Reserve Bank (SARB). Interest rates for monthly repayments on existing debts like car finance, credit card balances and your home loans are directly linked to the repo rate. Therefore, the SARB’s decision to raise or lower the repo rate will affect the amount of money that consumers with debt, have available to save.
Interest rate changes can have a positive or negative effect on the economy. “Interest rate reviews are conducted every two months to help unpack variables that affect the economy like investments, inflation and unemployment,” says Himal Parbhoo, CEO, FNB Retail Savings and Cash Investments.“Interest rates affects every household and business; from using credit cards, bond and car repayments, grocery purchase to even contributing to savings and investments.”
Parbhoo explains that “simple interest refers to the interest earned on the capital amount or original deposit. Compound interest refers to the interest earned on both the original deposit as well as interest earned since.”
Parbhoo illustrates an example of how this works below
Suppose you invest R100,000 for 5 years at an interest rate of 8% per annum
Simple interest
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Annual compound interest
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| Monthly compound interest (also referred to as a nominal rate compounded monthly)
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Summarising our example – after a 5-year investment:
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There are many factors that affect the level of savings in savings accounts. Savings become more attractive when there is an increase in interest rates. This sometimes encourages consumers to save more which will help maintain their lifestyle. Parbhoo adds that, “We encourage consumers to save more and reduce their debt when interest rates are higher. However, lower interest rates reduce the interest benefits of savings, making savings a bit less attractive”.
Important to understand how interest affects your savings vehicle. He advises that consumers should:
- Maximise your savings when the interest rate increases or remains unchanged. Consider contributing a bit more to your savings account monthly. This will help if interest rates decrease.
- Consider simple savings mechanisms like Bank Your Change which is a great savings mechanism available on most personal cheque accounts. It is a savings account linked to your FNB transactional account that allows you to keep your savings separate. With this you can easily put money away and earn interest on money saved. It’s easy and convenient and there are no added fees.
- Don’t spend your hard-earned money on unnecessary things, should you have a bit of a relief on interest rates. Rather put more money away instead of spending money on unnecessary expenses.
- Review and refresh your savings. Ensure that you aware of your current interest earned on your savings account.
Ongoing savings in the current economic climate cannot be ignored. “With the challenging environment, we encourage consumers to continue saving and maximising on their interest rates where possible. This will only improve the savings culture and mindset in South Africa,” concludes Parbhoo.
