The interest rate demystified: part 1

As the old saying goes, what goes up must come down, and this applies not only to physical objects but also to economic constructs such as the interest rate. Concepts such as the interest rate and inflation can seem confusing and overwhelming. In this two-part feature, 3Cube Property Solutions will demystify these concepts and explain how interest rate rises and hikes can both benefit you - whether or not you're a business owner.

First things first: What is interest and how does it work?

Interest is the cost of borrowing money or, conversely, the money investments earn over time. When you borrow money from the bank (in the form of a home loan, for example), you pay interest to the bank for the privilege of using their money. On the flip side, when you deposit money into a bank or make an investment, the bank or institution pays you interest as a reward for keeping your money with them. The amount of interest that you pay or earn will be determined by the interest rate you were offered.

The repo rate and interest rate explained

In order to lend you money, banks borrow money from the South African Reserve Bank. The rate at which the Reserve Bank loans money to the banks is called the repo rate. Banks then lend money to their clients at a rate based on the prime interest rate. The repo rate and the prime interest rate are linked, which means that if one fluctuates, the other will fluctuate accordingly.

If you want to borrow money from the bank, it's unlikely that the interest rate you will be offered will be the exact prime interest rate. The rate you are offered will depend on what type of loan you're taking and what your financial situation and history are. Simply put, the lower the perceived risk to the bank, the lower the rate that you'll be granted.

How interest rates affect property loans and buying power

As the interest rate rises, it becomes more challenging to get onto the property ladder. The amount of money that banks will lend you becomes lower as the interest rate rises. At the same time, monthly repayments rise with the interest rate, making it more difficult for existing homeowners to manage their debt. Conversely, when the interest rate falls, more finance is available and repayments are more affordable.

Everything you need to know about inflation

As Old Mutual  explains, "Inflation refers to the general increase in the price of services and goods in a country." Unlike the interest rate, inflation is not applied across the board and it's possible for food prices to go up, for example, while electronics prices stay the same and the cost of other commodities may even drop.

Various factors cause inflation to rise - the first of which is the well-known "supply and demand" principle. If something is sought after and there's a limited supply of it, the price will go up. Costs may also increase due to increased production costs - common cost increases that affect various industries include oil prices, exchange rates, salaries and interest rate hikes.

Inflation needs to be controlled, and interest rates are often the mechanism used by the South African Reserve Bank to keep inflation within the required range. The interest rate can be decreased if economic activity levels need to be higher or increased when they need to be lower.

How rises and falls in the interest rate can benefit you

At face value, interest rate hikes seem altogether negative: they are a force that will compel you to pay more on your home loan and vehicle loan - as well as any personal loans or business loans you may have. There is, however, a flip side to the coin. If you have investments, you'll get a higher monthly return on them. Just as a higher interest rate means higher repayments on debt, it also conversely means higher returns on your investments.

From a business perspective, lower interest rates (and lower borrowing costs) can boost a company's profits and encourage business expansion. Conversely, higher interest rates can lead to lower share prices.

A brief history and geography lesson: how does South Africa's interest rate fit into global figures

South Africa's current prime interest rate (also called the prime lending rate) is 11%. This comes after a series of slight drops in late 2024 and early 2025. The current rate is far from either the highest or the lowest that our interest rate has been. The pandemic outbreak in 2020 brought with it historic lows in South Africa's repo dropping to just 3.5% and the corresponding prime lending rate to 7%. On the flip side of the coin, various economic factors culminated in 1998 to make the repo rate hit an eye-watering high of 23.99%.

While the current 11% is making debt uncomfortable for many South Africans, there are parts of the world where far higher interest rates prevail. The two African countries with the highest interest rates are Zimbabwe and Nigeria, with repo rates of 27.5% and 35% respectively. The Seychelles and Botswana, on the other end of the scale, have interest rates of 1.75% and 1.9%. Globally, the hardest hit nations are currently Venezuela and Turkey, with respective repo rates of 59.36% and 45%.

In part 2 of this feature, we will share more insights on interest rates and related economic constructs. In the meantime, if you'd like more interest rate insights or information about how the current repo rate can help your business, get in touch today.