How the fluctuation of the interest rate affects your debt
Managing your finances doesn't just mean monitoring the money going in and going out of your account each month. It also means considering what inflation will do to your purchasing power and the value of your debt.
Inflation, by definition, is the rate at which the cost of goods and services rise over time. It could also be thought of as the reduction in the Rand's value seeing that consumers will be able to purchase less than they previously could with their given income. When observing the South African economy, the inflation rate has been decreasing from 6.34% in 2016 to 3.88% in 2021, and it's expected to rise to 4.5% in the foreseeable future.
When looking at the effect of inflation on credit and debt, you first need to take into consideration the effect of inflation on the effect of interest rates.
There is a general tendency for interest rates and the rate of inflation to have an inverse relationship. Meaning, when interest rates are low, the economy grows and inflation increases. Conversely, when interest rates are high, the economy slows, and inflation decreases.
Therefore, when debt interest rates are high, people have less spending power because they must spend a larger portion of their income repaying the money they borrowed. As a result, the inflation rate falls due to the decrease in consumer spending.
How has Covid-19 influenced inflation?
When the Coronavirus pandemic hit, it caused a massive disruption of global economic activity — resulting in many businesses closing down and even more people losing their jobs or taking a pay cut. As a result, people were getting deeper into debt, incurring more debt to cover their current debt, and eventually declaring bankruptcy or seeking debt relief.
Looking at the South African economy, the South African inflation rates have been benign, allowing the Reserve Bank to cut interest rates more aggressively than in the past. The most recent 0.5 percent cut was motivated by the need to provide relief to people in debt, many of whom are under extreme financial stress.
A reduction in interest rates will allow monthly debt repayments to be reduced, providing much-needed debt relief.
Are you struggling to pay off your debt?
Please contact us so that we can look at the best solution for you based on your current financial situation.