WHY INTEREST RATES AFFECT US

ECONOMIC LITERACY

WHY INTEREST RATES AFFECT US

An interest rate is the amount of money that a lender charges a borrower for a loan. The interest rate is usually given as a percentage of the total amount borrowed. 

If, for example, you borrow R100 from a lending institution they can charge ten per cent interest on the amount borrowed. Ten per cent of R100 is R10, which means you will have to pay back the R100 you borrowed plus R10 interest.

Prices increase

Government has given the South African Reserve Bank the task of making sure that inflation - which is the general increase in prices - does not go up too much. 

The Reserve Bank does this by changing the interest rates from time to time. A decision of the Reserve Bank earlier this year not to raise interest rates means that government is protecting the people from general price increases. 

Currently, if you buy goods like furniture or a car on credit, you borrow money from a bank or other financial institution at a 14,5 per cent interest rate. This means if your furniture cost R1 000, you will pay R1 000 plus R145 interest on the loan.

Reduce spending

One of the main reasons for not raising the interest rate this year, is that South Africans have been buying less on credit. Part of the reasons why the interest rates were raised more often last year, is that we bought too much on credit. 

This means we spent money that we didn't have. If we do this, we put pressure on the Reserve Bank to give other banks more money. In turn, the banks lend out more money, which leads to people spending money they don't really have. 

When this happens, the Reserve Bank is forced to act by raising the rate at which it loans money to the banks. The banks in turn raise the interest on the loans they give people.

- - Muzi Mkhwanazi

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