What is in an interest rate cut?

The Monetary Policy Committee, the folks at the Reserve Bank who set the interest rates, have their first meeting for 2010 on Monday 25 and Tuesday 26th of January, next week. The MPC is mandated to follow a policy of inflation targeting using interest rates. According to international ratings agency S&P there is no change in policy expected. The new Governor, Gill Marcus, should have found her feet by now and she calls the shots on the interest rate. So what does the interest rate affect?

 

• Your homeloan
• Your credit cards
• Your personal loans

 

Inflation is the key factor in whether the MPC decides to change the interest rate. Inflation is currently sitting at 5.8% which is just within the Reserve Bank target range of 3 to 6 percent. This has led analysts to believe that there will be no change in the interest rate next week. Inflation targeting using interest rates is a heavy hand and takes some time to translate its effects into the general economy.

Your homeloan is generally granted at some expression of Prime. Prime is the rate at which the commercial banks will lend to you at, the Repo rate is the interest rate at which commercial banks can borrow money from the Reserve Bank at. Your homeloan is more than likely linked to prime, if the MPC changes Repo this will alter the Prime which is generally 3.5% above the Repo. Credit cards are often linked to the interest rate as are any personal loans you may take. There is no expectation of the interest rate changing but we shall see.