What is the Repo Rate?

The repo rate (repurchase rate) is the interest rate at which commercial banks can borrow money from the Reserve Bank.
Repo rate

South African banks in the private sector, like ABSA, Standard Bank, FNB and Nedbank, can borrow money from the South African Reserve Bank (SARB).

The repo rate is the interest rate SARB charges the commercial banks for this privilege.

In order to make a profit, the banks then lend out this money to their own clients, at a higher interest rate (see prime rate).

South Africa’s repo rate is analogous the Fed Funds Rate in the United States.

How does the Repo Rate affect me?

When the repo rate changes, it affects the prime lending rate. The prime lending rate in turn affects the interest rate the commercial banks charge their customers (i.e. you and me).

If you have a loan and the repo rate is increased, the interest rate your bank charges you on your loan is also increased (with some exceptions, e.g. if you have a fixed rate loan).

How does the Repo Rate affect the economy?

The repo rate is one factor that controls the supply of money in South Africa, which in turn has an influence on things like:

  • consumer spending power,
  • national debt levels,
  • business growth, and
  • inflation.

When the repo rate is lowered, the money supply is increased.

This is a good way to encourage business growth and consumer spending, because businesses and consumers (i.e. you and me) can borrow money at cheaper rates.

However, an increase in the money supply makes the currency more vulnerable to inflation. Just as with any other commodity, when there is more money available, the value of money decreases.

When the repo rate is hiked, the money supply is decreased.

This is a good way to keep inflation down, but it discourages business growth and consumer spending, because it makes it more expensive for businesses and consumers to borrow money.

When the repo rate is hiked, it also places significant pressure on businesses and consumers who’ve overextended themselves with debt. A few consecutive hikes in the repo rate are usually accompanied by an increase in bad debts, property and vehicle repossessions, liquidations and bankruptcies.

Who controls the Repo Rate?

Approximately six times a year, a group of people called the Monetary Policy Committee (MPC), meet up to decide if and how the repo rate should be changed.

According to SARB’s website:

Inflation targeting is a monetary policy framework in which the central bank announces an explicit inflation target and implements policy to achieve this target directly.

The inflation target is for the year-on-year increase in the headline CPI (CPI for all urban areas) to be between 3 and 6 per cent on a continuous basis as from 25 February 2009.

In other words, the main aim of the MPC is to keep inflation in check.

This is not as simple as it seems. The MPC only have one blunt instrument at their disposal (the repo rate), while inflation is influenced by many factors that are beyond their control (e.g. the exchange rate, oil price and macro economic conditions).

Furthermore, it can take a lot of time before the changes to the repo rate is “felt” and the affects filter through to statistics.

Deciding what the repo rate should be is a continuous balancing act.

This definition is part of the Dictionary of Financial Terms. If you want to receive a notice every time a new definition is published, you can subscribe to Liberta.

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  1. leon bosman

    thank you

  2. barend

    What is the definition of base lending rate in South Africa

  3. Francois Viljoen

    @barend

    The base lending rate is the REPO rate in South Africa.

  4. karin langley

    how does commercial banks like Absa and FNB benefit from the SARB?

    WHO IS RESPONSIBLE FOR THE ISSUING OF NOTES AND COINS IN SOUTH AFRICA?

    WHO IS THE CURRENT PRESIDENT OF THE SARB?

  5. ZIBUYILE HAPINESS MTHIMKHULU

    I AM DOING BARCHELOR OF COMMERCE (FOUNDATION) AT UNIZULU 2ND YEAR.BUT MY DREAM IS TO BECOME A HR MANAGER OR FINANCIAL MANAGER SO CAN YOU PLEASE ASSIST ME IN GIVING MORE INFORMATION BASED ON COMMERCE LIKE QUETIONS AND ANSWERS.

    THANKS FOR YOUR ATTENTION.

    MISS ZH MTHIMKHULU.

  6. Dhimal Moodley

    The information above mentions that the Bank’s target inflation is based of CPIX figures. Is that not meant to be CPI since the Bank concluded that there is no need to exclude cost of mortgages anymore?

  7. Francois Viljoen

    @Dhimal

    You are absolutely correct – thanks for pointing this out.

    The SARB’s website has been updated since this post was written.

    I amended the post accordingly.

  8. Dhimal Moodley

    I am attending an interview a job at the SARB and I have a few queries that I need to unravel.

    1) Why was the the cost of mortgages excluded in the inflation figure before? Why is it included now?

    2) The Repo rate is a measure of the short term interest rates in SA. Correct? How is it used by the SARB to curb inflation?

    ……heres my understanding…..

    By increasing interest rates, foreign capital inflows will be encouraged. The rand will strengthen. Imported inputs will be cheaper which will reduce the cost of manufactured goods. Hence, lowering inflation.

    Furthermore, an increase in interest rates will result in less liquid money in circulation (i.e. money supply will decrease), which will strengthen the value of the rand (due to scarcity)

    This is my understanding of the Bank’s tools to curb inflation. Could you add anything to strengthen my knowledge? Or correct me where I might be incorrect?

  9. Francois Viljoen

    @Dhimal

    1) Good question – I don’t know! Please share here if you find out.

    2) You’ve got it right – it has to do with money supply.

    In very basic terms:
    Higher interest rates = borrowed money is harder to come by = lower supply of money = lower inflation.
    Lower interest rates = borrowed money is easier to come by = higher supply of money = higher inflation.

    You also address the issue of capital inflows and outflows and you’ve got it correct:
    Higher interest rates = higher capital inflows = stronger Rand.
    Lower interest rates = higher capital outflows = weaker Rand.

    Note that a stronger Rand benefits “net importers”, i.e. industries that import more materials than they export, e.g. importers of computer equipment.

    It is easy to see that a stronger Rand results in cheaper computer equipment, because 99% of all computer equipment in SA is imported. I.e. inflation on computer equipment is lowered when interest rates are increased, because the Rand strengthens.

    A stronger Rand does not benefit local industries that have to compete with their foreign counterparts, e.g. the local clothing and textiles industry. In this case the local industry will suffer, because now they have to compete with goods imported cheaply from other countries.

    However, even in this case it results in lower inflation, because the local industry will have to cut costs and lower their prices to compete with the cheap foreign imports. And lower prices means lower inflation.

  10. Def

    If exports increase dramatically what will happen to the repo rate?

  11. Francois Viljoen

    @Def

    I assume you are talking about a situation where for example a massive amount of crude oil is discovered in South Africa and our net exports suddenly increase dramatically.

    If so, your question is almost impossible to answer, because of all the variables involved.

    What you are actually asking is what is the effect of a dramatic increase in exports on inflation, since the REPO rate is adjusted by the SARB as necessary, depending on the inflationary pressures in South Africa.

    If we assume all other factors stay exactly the same (which is totally unrealistic) and the only factor that changes is a massive increase in exports, then:

    Increase in exports => increased money supply => higher inflation => SARB hikes REPO rate to combat higher inflation

    In reality the situation is much different. It depends on all the other factors involved. If we use my example of South Africa discovering a huge amount of crude oil, there are so many other factors that have an influence on inflation. Here is one example (there will be many others):
    SA starts exporting massive amount of crude oil => more oil available in the world => increased oil supply, but demand remains constant => price of oil drops => price of all transport in SA drops => lower inflation

  12. navisanga

    good one, well explained, now i understand the repo rate. Apart from the issues of high interest rates/lower interest rates, inflation, capital flows, what are the policy implications of the repo rate for the economy as a whole? what is the ideal repo rate?

  13. Francois Viljoen

    @navisanga

    I really don’t know what more to say about the effect of changes in the REPO rate other than what I’ve already written in the article!

  14. navisanga

    oky, i just thought maybe there could be more. Thanks for you article well written and very clear

  15. Quentin Ngcobo

    how does the repo rate inluence the market interest rates?

  16. Francois Viljoen

    @Quentin

    I believe your question was also answered quite clearly in the article…

  17. Mungroo.I

    Thanks for this explanation on repo rate etc , which i did not understand fully .

    It is very concise and helpful for people with non-financial background.

    It becomes a pleasure to read articles from such experts, who make the subject become easy for others.Many thanks to them

  18. Mungroo.I

    Why is higher interest rate proportional to higher inflow of capital ?; as pointed out by by Francois, could you please elaborate and explain in detail

  19. Francois Viljoen

    Higher interest rates mean it is possible to earn better returns.

    I.e. higher interest rates in South Africa makes it more profitable for foreign countries to invest here.

    Thus higher inflow of foreign capital.

  20. Pedro Mzileni

    More financial education for me 🙂 Comrades I encourage you to read these basics so as to make sense when we speak http://t.co/REc7d1HZ

  21. Roger K-79

    How does repo rates influence prime rates

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