South Africa’s interest rate is at its highest level in five years – on 21 July, the South African Reserve Bank (SARB) announced that interest rates would increase by 75 basis points (bps), taking the repo rate to 5.5% and the prime lending rate to 9%.
It’s anticipated that rates will continue to rise. Our economists at Schroders predict that rates in the US will reach 3% by the end of the year and that in the UK they’ll hit 2.25% sometime in the first quarter of 2023.When a central bank, such as the South African Reserve Bank, Bank of England, US Federal Reserve or the European Central Bank announces a new rate, this determines the cost to local banks when they borrow.
For example, the Bank of England’s and the European Central Bank’s inflation target is 2% while the Fed targets an average inflation of 2% over the long term. In both economies, current annual inflation is at close to 40-year highs at 9% in the UK and 8.5% in the US and 7.5% in the eurozone .Central banks try to influence spending habits when they change interest rates. Interest rates influence the overall level of activity in the economy.
Importantly, higher interest rates won’t have an immediate impact – it takes time for their effects to filter through the economy.Generally a rise in interest rates is good for savers and bad for borrowers . Some loan agreements – including certain mortgages and credit card deals – have rates which are fixed for a set period. But they usually revert to a variable rate at the end of that term, so check the details of any credit agreements.
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