Tough times do not last, but tough people do

This feature focuses on the repo rate and what it means to the youth.

The term repo rate is the rate at which commercial banks, such as First National Bank Namibia, borrow from the central bank, i.e. Bank of Namibia.

It is considered the base rate against all other interest rates when the economy is set. The interest rates for car loans, home loans, personal loans, business loans, credit cards, etc. are determined by adding a certain percentage over the repo rate.

This is the same rate that applies to interest rates on savings and investments.

Two-month intervals

FNB’s Nandango Ruusa said the repo rate is determined by the Monetary Policy Committee of the Bank of Namibia every two months.

The committee reviews the state of the economy by considering factors such as the gross domestic product (GDP), inflation and credit uptake.

Because the Namibian dollar is fixed to the South African Rand, the Bank of Namibia also considers the repo rate in South Africa.

Generally, it is ideal for Namibia’s repo rate to be at the same level or above that of South Africa’s. This way it prevents capital from moving out of Namibia to South Africa if the interest rate earned in South Africa is higher.

“The repo rate affects the community differently depending on whether individuals are borrowers or savers. If it increases, borrowers have to pay more for their loans, which leaves less money in their pockets,” Ruusa said.

Higher earnings

However, higher interest rates mean that savers can earn more on their savings and investments.

And, an increase in the repo rate has ripple effects in the economy beyond the cost of loans.

For example, if a business has to pay higher interest rates on its loans, it may choose to increase the prices of products and services sold to consumers to make up for that.

Ruusa added that one of the reasons to control the repo rate is to prevent severely high levels of inflation.

When inflation is high, central banks increase the repo rate so that there is less money circulating in the economy as it is more expensive to borrow.

The less money is circulating in the economy, the less people spend, making it difficult for retailers to increase prices, and this ultimately brings down inflation.

On the other hand, when inflation is low, the central banks reduce the repo rate as it is cheaper to borrow more money to circulate in the economy and prices increase.

Financial prudence

An economist from Simon Storm, Theo Klein said that for young individuals who already have debt with any bank, they will face higher monthly debt repayments which could lower the amount of money they have available for spending on other basic necessities such as food, fuel and personal care amongst other things.

Klein added that commercial banks adjust their interest rates on various debt products (e.g. home loans, overdrafts, car loans, etc.) as the repo rate changes.

Therefore, young individuals who want to apply for loans to buy cars or houses will face higher monthly debt repayments as the repo rate increases.

This means higher interest repayments must be factored into personal budgets by young individuals for long-term sustainability.

On the one hand, young individuals who invest their savings in interest-bearing instruments will see a slightly higher return on their investment.

As the repo rate increases, interest rates on short-term investments will also increase.

As the saying goes: "desperate times call for desperate measures."

Now is not a time for luxury spending, but for financial prudence.

If need be, lifestyle sacrifices need to be made in order to survive tough economic times.

Where possible, trying to earn a second salary could also be an option. Always remember that tough times do not last, but tough people do.