The recent rise in the repo rate, the rate at which the Reserve Bank lends money to commercial banks, to 8% has raised the prime interest rate to 11,5%. This makes borrowing money to finance home and car purchases more expensive. But every dark cloud has a silver lining — and money market, fixed-deposit rates and savings for pensioners and other investors have seen a boom.
At Absa, for instance, those who have 12-month deposits of between R10 000 and R100 000 have seen the interest rates offered soar. On April 19 this year these sums would have fetched you 5,3% but Absa now offers 7,6%. These rates have risen faster than the Reserve Bank’s marker — 2,3% up compared with a 1% rise in the repo rate over the same period. Seniors qualify for an additional 0,5% on these rates.
This is largely because the product pre-empts prime as the bank’s fixed rates take into account forward rate reviews and projected economic cycles a year in advance. Absa’s MoneyBuilder, a daily savings product, has gone up by 0,9% over the past two months in response to the 1% repo rate change.
Similarly, Standard Bank’s rates for a fixed-deposit investment of between R10 000 and R100 000 yields 7,6% interest if it pays interest monthly, but 7,85% if you wait for the product to mature. An increase in the prime rate has a profound impact on the yield curve, especially for shorter-term rates, says Eric Larsen, head of Standard Bank’s communication department.
He explains: “A 0,50% increase in prime lending rates does not imply that 12-month fixed deposit rates should increase by the same amount at the same time.” This is because the fixed deposits are priced against the interest rate yield curve, which is a line between current interest rates and expected future rates. Any changes in the yield curve through different market forces — for instance, the inflation outlook, the exchange rates, the price of oil — often result in fixed deposit rates being adjusted outside of prime lending rate changes.
For example, Standard Bank’s 12-month fixed deposit rate, for investments of R10 000 to R99 999, was changed to 6,85% when the prime rate moved in June this year. The rate was adjusted upwards again on July 13 to 7,25% — an increase of 0,4%. This rise was not occasioned by any change in the prime rate, but rather in response to changing dynamics in longer-term rates on the yield curve. The rate was then further increased on August 5 from 7,25% to 7,6%.
At Nedbank the recent interest rate hikes have seen the relaunch of PrimeSelect, a flexible investment product that is responsive to any changes in the market. This allows an investor to reap benefits from increasing rates instead of being locked into a fixed rate.
For instance, a 12-month fixed deposit on July 18 would have produced a 6,9% interest yield. Just under a month later, on August 12, a similar product would get you 7,6%.
“We relaunched it because customers believe the interest rates are going up,” explained Bryan MacLachlan, head of Nedbank’s transaction and investment products.
Senior citizens get an additional 0,5% bonus if they are reinvesting an existing 12-month deposit with the bank. However, because PrimeSelect is priced at 65% of the prevailing prime rate, one gets a return of 7,47% — 0,13% less than the fixed-deposit rate the bank and competitors offer.
First National Bank has upwardly adjusted its money markets, 32-day Interest plus, 12-month Interest Plus and other investment products. The product that has been jazzed quite dramatically is the 12-month fixed deposit for seniors that has gone up 1,40% to 8,1%. However, the ordinary fixed deposit rate, at 7,5%, lags behind the other three big banks.
However, it is at Capitec that ferment is quietly brewing. While the trend at the big four banks is to reward you if you invest more money, Capitec will give you more interest if you have less savings.
“We are trying to encourage the smaller investor,” says Carl Fischer, CEO for marketing and corporate affairs. He says his bank offers the highest savings rate of 10% a year on any balance from as little as R10 to R10 000. An investment of R10 001 to R25 000 will yield 7,5% interest. Investments over this figure but below R100 000 will get 1% less. Beyond this the yield is 6%. The novelty is offering less interest for bigger sums, sums that are normally deposited by well-to-do people or institutional investors.
Fischer says that unlike in other institutions, you can walk into a Capitec branch and claim your money without giving the bank notice. “We don’t want to restrict the client; we don’t want to penalise the client.” He says the bank is trying to make clients’ money accessible at a low cost, to the benefit of the customer. “We charge a monthly fee of R3 no matter how many transactions you perform.”
Whether the repo rate goes up or down won’t materially affect the investor at Capitec. “We won’t change the interest rate. In fact, we haven’t since 2001,” says Fischer.
But you need to remember that as a microlender, Capitec’s focus is more on lending money, which is where it makes the bulk of its profits.