The upside of interest (yes, there is one)
15 November 2018
“Interest rates” might sound like a complicated term that has nothing to do with you and you’ve probably thought to yourself, that if you just ignore it, it won’t affect you, right? Wrong. It affects every single one of us in one way or another – whether you acknowledge it or not. But it’s not always doom and gloom. There is an upside to interest rates too and, like with most things in life, being informed is key. That’s why we spoke to Tsitsi Hatendi-Matika, Head: Retail Investment Specialist at Wealth and Investment Management and asked her to unpack this seemingly-complicated term for us.
So, before we get into it, it’s important to understand exactly what we mean when we refer to the interest rate. According to Hatendi-Matika, it can be simply explained as the cost of borrowing. “Whenever you borrow money from the bank – whatever the reason may be - you have to pay it back. And the additional rates that the bank or alternative lenders charge you while you’re paying it back is calculated based on the interest rate.” Now, it’s also important to understand that when we say ‘borrowing money’, it includes everything from student loans, car loans or vehicle financing and home loans to credit cards, overdraft facilities, small business loans, as well as micro-lending that doesn’t take place at a formal institution such as the bank.
Which brings us to the Monetary Policy Committee (MPC) Announcement that takes place on 22 November. This takes place every second month, six times a year, and is basically when the Governor of the Reserve Bank, Lesetja Kganyango and his staff consider all the relevant factors and make a decision on whether to increase, decrease or leave the interest rate unchanged. Hatendi-Matika explains that everyone should care about the MPC Announcement because even if you’ve never borrowed money from the bank and you don’t have any debt, a changed interest rate impacts the cost of living – which will always impact you, no matter what you earn or what your lifestyle is. For example, when the cost of borrowing money rises for businesses, the costs are passed on and ultimately hit the consumer’s pocket in the form of price increases on everyday items. “Another important thing is that even if you have no debt, access to loans or excess cash for the business you or the breadwinner in the household works for become constrained in a higher interest rate environment,” she explains.
With that said, she also says that it’s important to understand what a decreased interest rate and in turn what an increased interest rate means. Spoiler alert - lower isn’t necessarily always better. “Interest rates are used as a mechanism to contain inflation and essentially helps to keep everyday items as affordable as possible. A lot of people think that if the interest rate were to decrease, it would help individuals and make living more manageable. This is a massive misconception because low interest rates in a high inflationary environment are more detrimental to the Average Joe in the long-term.”
Yes, higher interest rates make it harder for people to borrow money, which means that they spend less, which essentially impacts the economy. Bad debt also becomes more apparent when the interest rate is higher because people struggle to afford their lifestyles and in turn can’t repay their loans – which will become more expensive. If you find yourself struggling with repaying your debt, you can explore your options here.
But the upside is that higher interest rates are great for people who have savings accounts, as well as pensioners. “It means that you’ll essentially earn better interest on your investments if you don’t have a fixed interest rate. Pensioners can especially benefit because they generally have low-risk investments and they fall into a tax bracket where they pay a bit less than everyone else.” If you’re looking to invest and trying to figure out how much risk you’re willing to take and what’s a good return – we’ve got you covered, here.
So, can we expect to see a changed interest rate after the MPC announcement on 22 November? Hatendi-Matika doesn’t think so. “Inflation is still within the 3-6% target band set by the Reserve bank- which means that inflation is still relatively contained. Given the data that we’ve seen recently I don’t expect that this has changed too much.” She does however add that the vote was 4-3 last time, in favor of no hike, but the committee had 7 members at the time, whereas there are now only 6 members. “This means that the feeling inside the committee is very much split and I think we might see another finely balanced outcome this time around.”
While none of us know exactly what’s going to be announced, it’s reassuring to know that there is an upside to interest rates, right? If you want to know more about our interest rates and savings options, visit our website here.
And, if you want to do some more jargon-busting now that you understand how interest rates work, we’ve got you covered in this blog post.
Disclaimer: The advice contained on this blog is for general purposes only and does not take into account individual circumstances, objectives or financial needs. Accordingly, readers are advised to seek appropriate advice from licensed professionals prior to making any investment, or taking up a financial product or service.