The repo rate increase is not all doom and gloom for savvy consumers

The repo rate increase is not all doom and gloom for savvy consumers
The repo rate increase is not all doom and gloom for savvy consumers

The South African Reserve Bank’s announcement that the repo rate would rise by 25 basis points is not the best news for consumers. But Nedbank’s Head of Retail Investments, Sisandile Cikido, says a change like this is an opportunity for smart investors to diversify their investment portfolios.

‘An interest rate hike means that the loans you have (for example hire purchase agreements or mortgages) will be more expensive. But it also means that the interest banks pay on certain investments will be more. And a higher interest rate cycle is the ideal opportunity to take out an investment that would lock in that rise over the medium to longer term, because in due course, interest rates will go down again’, says Cikido.

She further explains that certain notice and term-investment accounts tend to offer higher interest rates after an interest rate hike. ‘When the interest rate is high, opening an investment account is a way of locking in that benefit, even when the cycle turns.

Cikido emphasises that diversification should be a key principle of any investment portfolio. ‘A fixed-rate or term investment involves investing money for a specific number of months. During that time, you cannot access your money without being charged a penalty fee. And to maximise growth, you should capitalise the interest that you earn. It’s also wise to have money in an account with a variable interest rate that you can access quickly in emergencies. Covid-19 proved the value of this approach as the proverbial ‘rainy day’ became a reality. Life goes on during a crisis, and you need access to money within a reasonable time,’ she says.

The table below illustrates how your money can grow if you invest it in a Nedbank 12 months Tax-Free Fixed Deposit available to South Africans to take advantage of the higher interest rate depending on how much you invest.

Capital Interest rate Daily interest Start date End date Investment term Interest amount
R36 000,00 9,05% R8,93 1 March 2023 1 March 2024 12 months R3 266,93
R75 266,93 9,05% R18,66 1 March 2024 1 March 2025 12 months R6 811,66
R118 078,58 9,05% R29,28 1 March 2025 1 March 2026 12 months R10 686,11
R164 764,69 9,05% R40,85 1 March 2026 1 March 2027 12 months R14 911,20
R215 675,90 9,05% R53,48 1 March 2027 1 March 2028 12 months R19 572,14
R271 248,04 9,05% R67,25 1 March 2028 1 March 2029 12 months R24 547,95
R331 795,99 9,05% R82,27 1 March 2029 1 March 2030 12 months R30 027,54
R397 823,53 9,05% R98,64 1 March 2030 1 March 2031 12 months R36 003,03
R469 826,56 9,05% R116,49 1 March 2031 1 March 2032 12 months R42 635,79
R548 462,35 9,05% R135,99 1 March 2032 1 March 2033 12 months R49 635,84
R634 098,20 9,05% R157,22 1 March 2033 1 March 2034 12 months R57 385,89
R727 484,08 9,05% R180,38 1 March 2034 1 March 2035 12 months R65 837,31
R829 321,39 9.05% R205,63 1 March 2035 1 March 2036 12 months R75 259,21
R940 580,61 9.05% R233,21 1 March 2036 1 March 2037 12 months R85 122,54
R1 061 703,15 9,05% R263,24 1 March 2037 1 March 2038 12 months R96 084,14

Disclaimer: The amounts above are calculated at a static rate of 9,05% over 12 months.

The above illustration proves that, thanks to the interest rate hikes we’ve seen since November 2021, there’s never been a better time than now to start your investment journey. With that said, investors should always ensure they get good advice, says Cikido.

‘Every investment has pros and cons. For example, if the interest rate goes even higher, a fixed-rate investment would not benefit from the extra rise, but it will protect you when the interest rate drops. In contrast, an investment with a variable rate will benefit from all the interest rate hikes, but your returns will decrease as the interest rate inevitably goes down. Good investors always look at the bigger picture to optimise their investment portfolio.’