In the interest of interest: how rising interest rates affect your financial planning 

Understanding interest rates and how it affects your finances.

Interest rates explained

Interest rates have been rising consistently worldwide and it doesn’t look like this trend is going to stop anytime soon. This makes 2023 a daunting financial prospect for many South Africans as the country’s interest rate is the highest in five years.

South Africa has experienced six interest rate hikes in 2022 alone, with the last one hitting us by 75 basis points on 24 November. South Africa’s repo rate is 7%, and the prime lending rate is 10.5%.

As revealed by the 2022 Momentum UNISA Household Financial Wellness Index, in 2021, households experienced rising consumer price inflation, interest rate hikes and high unemployment, which made achieving financial goals more difficult. In these challenging times, even the financially well struggle to achieve their financial goals.

Interest rates affect everything from your bond to your savings and investments. But what are interest rates exactly? “Interest rates depict how much borrowing costs,” says Janine Horn, Senior Financial Adviser at Momentum.

While interest rate hikes negatively impact those with credit agreements, it is good news for those who save and invest.

“When the South African Reserve Bank (SARB) or any central bank in other states announces an interest rate hike, it determines the cost to local banks when they borrow. Therefore, this influences the rate at which banks will lend its consumers and the rate at which banks lend to each other,” she says.

Speaking to why interest rates are rising, Horn says, “Interest rates are being hiked at an arguably aggressive rate currently in efforts to control inflation. Usually, central banks, such as SARB, have an inflation target or an inflation target band. An inflation target is like the sweet spot for inflation, and it is important to keep the inflation rate at thate level.”

South Africa’s inflation target is between 3% to 6%. However, Stats SA revealed that consumer inflation is at a 13-year high of 7.8%, exceeding the target.

According to Horn, interest rate hikes have an adverse effect on those with credit agreements. “You can expect to pay more on all your credit agreements. This includes your mortgages, loans, credit cards and store credit. However, consider the details of your credit agreements, as some agreements have fixed rates for a set period.”

While interest rate hikes negatively impact those with credit agreements, it is good news for those who save and invest. “Those with savings will now earn more on their savings, and those who have diversified investments can expect to benefit from the interest rate hikes as well,” she says.

For Horn, there is no doubt that these rate hikes affect your financial plan and goals. “Interest rate increases and the high inflation rates affect South Africans’ budgets and spending. Therefore, now is the opportune time to relook at your financial plan and speak to your financial adviser. Your adviser will provide insightful advice on how to implement sound money habits, aiding your journey to financial success even in these difficult times,” she concludes.