What is a Repo Rate
As of 23 October 2023, the Monetary Policy Committee (MPC) of the Bank of Namibia (BoN) maintained the repo rate in Namibia at 7.75 percent. So the question is, what is the repo rate and why is it important?
The repo rate is the rate at which the central bank, in our case BoN, of a country lends money to commercial banks in the event of any shortfall of funds.
Repo rate is used by monetary authorities to control inflation. The theory is that by upping the repo rate the Reserve Bank makes it less attractive to borrow money. This reduces the amount of money in the economy, so there’s less to spend. As spending slows its harder to increase prices and this helps keeps inflation in check.
In banking, repo rate is related to ‘repurchase option’ or ‘repurchase agreement’. When there is a shortage of funds, commercial banks borrow money from the central bank which is repaid according to the repo rate applicable. The central bank provides these short terms loans against securities such as treasury bills or government bonds. This monetary policy is used by the central bank to control inflation or increase the liquidity of banks.
The government increases the repo when they need to control prices and restrict borrowings. On the other hand, the repo rate is decreased when there is a need to infuse more money into the market and support economic growth.
An increase in repo means commercial banks have to pay more interest for the money lent to them and therefore, a change in repo rate eventually affects public borrowings such as home loan, vehicle payments, etc. From interest charged by commercial banks on loans to the returns from deposits, various financial and investment instruments are indirectly dependent on the repo.
The effects of the repo rate
So how does this impact you? Commercial banks and other lenders increase or decrease their interest rates – known as the prime lending rate based on whether there is an increase or decrease on the repo rate. The prime lending rate is the cost at which banks are willing to lend money to consumers. The repo rate has a direct impact on the prime lending rate, which is the repo rate plus the amount which the bank adds to ensure sure they make a profit on their loans.
The higher the repo rate, the higher the prime interest rate. This means, unless you have a fixed interest rate, you will pay more on your loans. In short an increase in the repo rate means the cost of borrowing money increases.
The effects on of a repo increase
Interest rates on your debt will increase, however, this also means the interest rates on savings and investment products will increase too. This is the perfect time to start saving towards that one goal you have been putting off.
By way of an example, if you have a home loan worth N$1 000 000.00 and an interest rate of 4%, your monthly payments will be N$3 333.33. If there is a rate increase as a result of a rise in the repo rate and your interest is increased to 4.5%, your payments will increase to N$3 750.00 monthly. You pay more on your debts.
The effects on of a repo decrease
A repo decrease will mean that the interest on your house and vehicle payments or savings and investment products may decrease too. This means that the monthly repayments for your debt will decrease. However, the interest earned from your interest-bearing savings products may also be less.
Using the same example as above:
If you have a home loan worth N$1 000 000.00 and an interest rate of 4%, your monthly payments will be N$3 333.33. If there is a rate cut on the back of a repo decrease and your interest is lowered to 3.5%, your payments will reduce to N$2 916.67 monthly. You pay less for your debts.
This article does not constitute legal and/or financial advice. Kindly consult a registered financial or legal professional for appropriate advice on the subject matter.
