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<\/a>What are interest rates?<\/strong><\/p>\nInterest rates represent the cost of borrowing.<\/p>\n
When a central bank, such as the South African Reserve Bank, Bank of England, US Federal Reserve or the European Central Bank announces a new rate, this determines the cost to local banks when they borrow. In turn this steers the rate at which banks lend to each other, and it also influences the interest rate at which they will lend to the consumer (that\u2019s you).<\/p>\n
So when the bank rate goes up you would expect your mortgage rate to go up too, and vice versa. (Of course, other factors are involved in setting mortgage rates, including the stability of your income.)<\/p>\n
Why are interest rates rising?<\/strong><\/p>\n Central banks are currently raising interest rates in order to contain inflation (an increase in prices and a fall in the purchasing power of money). Most central banks have an inflation target or an inflation target band.<\/p>\n For example, the Bank of England\u2019s and the European Central Bank\u2019s inflation target is 2% while the Fed targets an average inflation of 2% over the long term. In both economies, current annual inflation is at close to 40-year highs at 9% in the UK and 8.5% in the US and 7.5% in the eurozone (as of April 2022).<\/p>\n In South Africa, the Reserve Bank\u2019s target band is 3%-6%. Current annual inflation is over 7% (as of June 2022).<\/p>\n Central banks try to influence spending habits when they change interest rates. Interest rates influence the overall level of activity in the economy.<\/p>\n If interest rates are higher we\u2019re more likely to save, because we\u2019ll earn more interest on our savings. Borrowing is also more costly. This reduces spending within the economy, which tends to dampen inflation.<\/p>\n Importantly, higher interest rates won\u2019t have an immediate impact \u2013 it takes time for their effects to filter through the economy.<\/p>\n Savings, loans, credit cards and store credit: what will higher interest rates mean?<\/strong><\/p>\n Generally a rise in interest rates is good for savers (you\u2019ll earn more interest on your savings) and bad for borrowers (you\u2019ll have to pay more on your loan).<\/p>\n As interest rates rise, you would expect to pay more for mortgages, loans, credit cards and store credit. Lenders are normally quick to pass on rate increases to borrowing customers.<\/p>\n Some loan agreements \u2013 including certain mortgages and credit card deals \u2013 have rates which are fixed for a set period. But they usually revert to a variable rate at the end of that term, so check the details of any credit agreements.<\/p>\n Although you\u2019ll be seeing many headlines about higher inflation and rising rates, the fact is that interest rates in most countries remain very low compared to their long-term averages.<\/p>\n What does this mean for my investments?<\/strong><\/p>\n The good news is that if you have a well-diversified investment portfolio some of the assets you are invested in may benefit from higher interest rates \u2013 such as cash. Conversely, you may see a drop in assets like bonds.<\/p>\n Although we are experiencing extremes in the market, the basic pillars of good investment still exist such as remaining calm and avoiding rash decisions, staying invested and speaking to a professional financial adviser about potential changes to your portfolio.<\/p>\n