Following a repo rate cut in March, investors should see this as an opportunity to place their savings into an equity-based unit trust.
This is according to Elize Botha, managing director of Old Mutual Unit Trusts, who has over 20 years’ experience in the financial services industry.
“A reduction in the repo rate is good for the economy, but it isn’t great for South Africans who are saving money in a bank account,” said Botha.
“Rate cuts will result in consumers, who have savings in short-term interest-bearing vehicles, earning a lower return on their hard-earned cash,” she added.
On the other hand, Botha pointed out that longer-term assets, such as bonds, property and equity-based unit trusts, benefit from rate cuts.
Impact on remaining debt?
Besides reducing returns on savings accounts and increasing returns on long-term assets, rate cuts could also be good for those in debt.
“This is the perfect opportunity for South Africans stuck in a debt trap to pay their liabilities off quicker, thereby allowing them to become financially free,” said Botha.
“South Africans with outstanding loans should take the opportunity of lower interest rates, should it arise, to use any savings to pay back their debt as quickly as possible,” she remarked.
But how does the repo rate work?
The South African Reserve Bank (SARB) reduced the repo rate by 25 basis points, from 6.75% to 6.50%,
This decision was made by the Monetary Policy Committee (MPC) at the end of March, and they meet every two months.
Botha explained that the repo rate is the interest rate commercial banks pay to borrow money from the Reserve Bank.
“By increasing or decreasing the repo rate, the Reserve Bank influences borrowing costs in the economy,” said Botha.
According to Old Mutual economists, only two rate cuts will take place this year. The MPC will meet again from 22 to 24 May.