Turn repo rate shifts into opportunities for your savings and investments

This is part one of Absa’s Staying the Course series.

The repo rate, inflation and the Reserve Bank’s decisions all play a role in shaping our finances, from savings and loans to monthly payments. Understanding how these factors influence our financial wellbeing can help us make informed decisions and prepare for economic changes. At Absa, we aim to empower you with the knowledge you need to stay on course and navigate the world of finance with confidence.

We’ve all experienced it. We hear a news report about the South African Reserve Bank’s (SARB’s) newest decision on the repo rate, and suddenly, we’re paying more or less on our home loan or car repayments. Every few months we have to readjust our budgets and, just when we’re about to get used to it, the next announcement arrives.

So how does the repo rate work? How is it linked to inflation? And who makes these complex decisions?

The SARB's Monetary Policy Committee (MPC) and the National Treasury set a target range for inflation, which is currently 3 to 6%. This target helps measure whether prices for goods and services are staying stable across the country.

To keep inflation within this target range, the SARB uses a tool called the “repo rate”. The repo rate is basically the interest rate at which the SARB lends money to banks. By adjusting this rate, the SARB can influence the overall economy. When the repo rate goes up, it becomes more expensive for banks to borrow money, which makes them charge higher interest rates to their customers, which in turn reduces borrowing and spending. When the repo rate goes down, it becomes cheaper for banks to borrow money. This means that you, as the customer, benefit from lower interest rates, which in turn usually encourages more borrowing and spending in the economy.

The repo rate gets its name from the word “repurchase”. Banks need cash to operate and lend to customers. To get this cash, banks temporarily sell something valuable (like a government bond) to the SARB.

The bank agrees to buy back (or “repurchase”) this item later at a slightly higher price.

The difference between the initial selling price and the repurchase price essentially represents the interest the bank pays to the SARB for borrowing the money.

So, when the repo rate increases, interest rates on your loans will increase, meaning higher monthly instalments. However, the good thing is that interest rates on your savings and investments often go up too, meaning it’s possible to earn more interest even though you’re paying more on your loans.

In November 2024, the repo rate was lowered due to the SARB governor’s analysis that economic growth was recovering in South Africa in the second half of 2024. Meanwhile, overall inflation of the economy dipped below the target set by the SARB, with prices of goods thankfully not increasing at the rate originally predicted. However, the governor does predict that overall inflation could rise to 4.6% in late 2025 – higher than the originally predicted 4.4% – likely due to electricity prices that are set to rise this year.

So, how can we take advantage of the changing repo rate?

1. When the repo rate goes up, your investments will grow faster, meaning it’s time to stash your cash. Take the time to look into new, risk-appropriate investments so you can grow your money. For those starting out, it may be time to look into opening one of Absa’s Tax-free Savings Accounts. With any investment account you open, the power of compound interest comes into play, where earning and retaining the interest received on your initial investment fast-tracks your earning potential as it increases your investment amount and therefore the interest you receive.
2. Put money away as an emergency fund. If interest rates on your savings are also rising, now is the time to establish, or grow your emergency fund. Most financial institutions recommend having enough savings to cover at least three months’ worth of expenses. That way, you can remain financially stable in the event of an emergency.
3. If the repo rate is decreasing, it may be time to pay off your debts. With overall lower payments on your loan, you can set aside the money you’re saving and put it toward further payment of the loan or other debts. Your monthly budget won’t have to change, and you’ll be working towards becoming debt free.

For more information on the SARB and MPC, visit the Reserve Bank’s website.

Please note the information we’ve provided does not constitute financial advice.