(written “tongue in cheek)
Listening to the financial guru who has a chat about things financial every weekday on Algoa FM, he explained how the repo rate works. Now we understand that the Reserve Banks lends money to the banks at the repo rate. The banks in turn lend the money to clients at prime which was 8.25% a few days ago (if you are an established client, a bit to a lot more if you are not and most are not). So the reserve bank now puts the repo rate up by 25 points (0.25%) to 6% and the banks immediately raise prime from 8.25% to 8.5%. OK we all understand that but, the guru’s next statement left me a little nonplussed. Roughly quoted he said that this was a way to encourage us to spend less and that way the government will hopefully curb inflation.
Well my dilemma is this. We won’t spend less but rather spend at least the same but differently, ie. Instead of buying takeaways for the family or new shoes for the kid who is growing like a beanstalk, we will simply give it to the bank for the increase in mortgage rate or car repayment, etc. Yes we will have less to spend on other things but we will still be spending what we were but now getting less. In fact we will probably now spend more because that kid cannot continue going to school barefoot, after all its winter, even if his dad did walk five miles to school barefoot through the snow when he was a kid.
So! The Reserve Bank is OK, they are earning 6% from all the money they are lending the banks and they will have plenty to keep the gravy train running smoothly. The banks too are OK because they are getting more money from the rates they are now charging their clients. And old Joe Citizen will be trawling the second hand shops for a pair of size 10 school shoes still in good nick.
And so to the next question! The banks are ‘borrowing’ money from their clients (they call them investments and bank accounts, which they have the audacity to charge us for) at rates way below the repo rate in most, if not all, instances so why are they borrowing money from the Reserve Bank, surely they have enough of their own, or rather ours. And if they are not borrowing all the money they need to lend to clients from the Reserve Bank but rather using their own clients’ money which they ‘borrow’ at way below the repo rate, they must be making a killing.
Now who does the repo rate really benefit? Certainly not the man in the street because we have to spend more so we are actually fueling inflation! And the bank shareholders must lick their lips in anticipation another hike in the repo rate and of the large dinner and a pair of Salvatore Ferragamo Italian shoes they will soon enjoy from the increase in profits.