South Africa's economy is facing a lot of challenges. The country is reportedly in its longest recession since 1994, and the South African Reserve Bank (SARB) has been forced to slash its growth forecasts for 2023 and the ensuing years. The central bank’s monetary policy committee raised interest rates several times in 2022, but those increases clearly haven’t done the trick - the rand has continued to fall, and inflation hit a five-year high of 6.5% in December.
In order to try and save South Africa from economic ruin, there are reports that the Reserve Bank could increase interest rates in early 2023—and that would likely result in even higher borrowing costs for consumers like yourself.
But don't worry! There are plenty of ways to protect yourself from rising interest rates (and other financial mistakes). In fact, with just a few simple steps you can make sure that your finances stay afloat no matter what happens next week or next month!
What is an interest rate hike?
Interest rates are the amount of money you pay for borrowing money, and they're set by the Reserve Bank. In South Africa, interest rates are determined by how much money people want to borrow (supply) and how much businesses and consumers want to save (demand).
The Reserve Bank uses interest rates as a signal to businesses and consumers about whether to borrow or not. When an economy is growing, more people will be looking to buy new houses or start a business—and demand for money will increase. That means there's more competition between borrowers who need access to funds in order to get their projects off the ground, so interest rates rise as banks compete for a limited supply of savings in order to meet these increased demands for credit.
Why does the Reserve Bank raise interest rates?
- The Reserve Bank considers raising interest rates to curb inflation.
- It wants to keep the economy growing so that more people can get jobs and earn money, which will help them buy more stuff and make South Africa a better place.
- It wants to protect the value of the Rand so that it doesn't collapse like it did in 2008.
- And finally, it wants to make sure that we can pay our debts.
How will a rise in interest rates affect me?
If you’re a borrower, a rate hike could mean you pay more for your loans. If you are saving money, your savings will earn less interest. If you have investments (or an investment portfolio), depending on the types of investments and where they are held (domestically or internationally), they may be worth less when the rates increase.
Your debts will cost more to repay as well. If you have a mortgage loan and there is no change in the term of that loan, then it might take longer to pay off the balance due to higher monthly payments resulting from higher interest rates.
What should you do?
- If you're a saver or investor, the first thing to do is talk to your financial adviser. Your investment strategy and debt strategy will need to be tweaked, but there's no reason why your savings strategy can't stay the same.
- If you're in debt and on interest-only loans, consider switching your loan to a standard mortgage with lower repayments. That way you'll have more money available for other expenses such as food, rent and entertainment.
- If you have life cover in place through an employer's pension fund or provident fund scheme, check if this will pay out when it comes time for retirement - some plans only pay out after death occurs so don't automatically assume that everything will proceed according to plan.
Do you have any options if the Reserve Bank does increase interest rates?
If you're worried about the impact of interest rate hikes on your finances, here are some tips to help you keep afloat:
- Get a good savings plan: If there's anything that can protect you from runaway interest rates, it's saving. An emergency fund is an absolute necessity and should always be at least three months of your income in cash or in a money market account.
- Pay off debt: There's no point having an emergency fund if it's being eaten up by credit card debt and personal loans. Paying down debt means that your monthly payments decrease, and this leaves more money available to cover other expenses like groceries, utilities and transportation costs.
- Save more: If possible, try to increase the amount you save each month so that when bad times come around (and they will), you will have enough money available to pay for your expenses and stay ahead of debt.
How to ensure you keep up with rate hikes and avoid going broke
You can make sure that your finances are safe by doing the following:
- Look into the best rate for you. You should always be on the lookout for higher interest rates in order to take advantage of them. It might seem like an obvious thing to do, but some of us are guilty of not focusing on what we’re spending our money on, whether it be bills or debt repayments. When you find an attractive offer from a new bank or credit provider, it’s worth switching over to them so that you can save more in interest payments.
- Review your current debts and see if there's any way that they can be refinanced at better terms (e.g., a lower interest rate). If this is possible with one or two of your existing loans, then it will help reduce how much money goes towards paying off those debts each month and increase how much cash becomes available for other uses such as saving for your retirement goals or investments like stocks and mutual funds.
- Interest rate hikes can be a serious threat to your financial wellbeing, but these steps can help to protect you and your assets when the time comes.
