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:
The South African Reserve Bank conducts monetary policy within an inflation targeting framework. The current target is for CPIX inflation to be within the target range of 3 to 6 per cent on a continuous basis. The Bank has a floating exchange rate policy and there are no exchange rate targets.
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.
