It's episode 10 of Season 2 and we are already in June, feeling that the end of the year is fast approaching. Arthi and Malika thought it was the perfect time to discuss what is in your best INTEREST,especially since in South Africa, we are experiencing an increase in interest rates which is impacting our budgets and quality of life.In this episode, they help us understand the drivers of interest rates, and how they impact us.
Arthi introduces four factors that affect the interest rate, firstly inflation. Companies increase the price of the goods and services when there's more demand, because this can lead to less supply, and those differences result in inflation.
The next two factors are the stock markets and international events and the decrease in available funds directly results in changes in the interest rates.
The final driver which affects interest rates is fiscal borrowing and in South Africa we have a large fiscal deficit. The deficit is the difference between governments income versus their expenses and when the government spends more money than what is coming in this means that in order to have the funds to pay back the markets, the rates are increased.
Arthi and Malika offer insights and tips into how you can respond and work with the change in interest rates and to look for opportunities within the chaos. Arthi also explains how it is not all negative and that there is a plus side to higher rates.
Listen in to hear Malika and Arthi discuss:
the mechanism the Monetary Policy Committee,MPC in South Africa, uses to control inflation i.e. the repo rate
More about the four factors that influence the interest rate decision
the true impact of interest rates on your spending plans or budget
The behavioral psychology aspect of spending & saving and how delayed gratification can help
Thinking like a wealthy person especially in times of every increasing rates
How to become that person who finds opportunity in chaos
And so much more!
Remember: “never pay for an item longer than, which that item may last”
We would love to hear your views based on the concepts covered in this episode.
Do rate, write a review, and share with others.
This episode is proudly sponsored by Old Mutual Wealth.
Arthi Rabikrisson:
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Malika Petersen:
Hello, I'm Malika Peterson.
Arthi Rabikrisson:
Welcome to
Malika Petersen:
The swan effect podcast.
Arthi Rabikrisson:
Money makes the world go round. Yet it's not so easy to understand its complexities, particularly when it comes to investing.
Malika Petersen:
That's why Arthi and I are using this platform to educate, inspire and help you gain confidence in your relationship with money
Arthi Rabikrisson:
So that you can better manage your finances and investments.
Malika Petersen:
We are two women in finance.
Arthi Rabikrisson:
That's pretty cool, isn't it?
Malika Petersen:
It certainly is. You've been in stock broking private wealth management, asset management, and now an award winning business woman who is coaching and assisting businesses with capital and strategic advice
Arthi Rabikrisson:
and Malika you have a wealth of experience in wealth excuse the plan in financial planning, investments and relationship management. So you're also at the coalface when it comes to where and how people are investing, about getting it right and getting it wrong
Malika Petersen:
and stuck in the grey areas too. Indeed I've seen the many phases and moods of financial cycle and how our decisions that those times impact us. So listeners and subscribers if you are looking to get unstuck, feel empowered and make some strides in how you tackle your money. We are here to help you.
Arthi Rabikrisson:
And it all starts with listening to this upcoming episode, enjoy It's the middle of the year everyone and very typical that we either feeling like where's the time gone by as well as the sense of oo its those mid-year pressures of targets to meet before the year end, yes that's the feeling that we have that this year is going to be over soon. Oh my goodness Malika this pressure that many of us have been feeling comes from that spill over I think of the post pandemic year being 2022. Where we all started to gear up into the new normal and then bang 2023 has just been upping and upping and upping the pace that alongside us as South Africans facing some real local challenges. It's just compounding. Where is your head at on this Malika?
Malika Petersen:
Hi, it. Hi, everyone. Thanks for getting to that sense of where we are at, spot on given that this is the start of June I think this is the right time for us to be doing that. Yes. I always like to be positive about it and I like to see the glasses off. Okay, we do need to Yeah, I'm that person we need to however just acknowledge that we are having a bit of a rough time lately. Loadshedding and other economic issues leading to our purchasing power, decreasing the cost of living increases, right. And let's make this why difficult for people to cope
Arthi Rabikrisson:
Oh, absolutely Malika and I mean, let's even talk a little bit about that. You know, what drives that cost of living? Right? Inflation. We all know this word inflation in South Africa has generally averaged at about 7% Over the last couple of decades, yeah. Which, you know, essentially means everyone, each year, we are paying 7% more for the same items than we did the year before. Imagine that right? That compounding effect from an inflation perspective, it hurts Malika. It's proper eina.
Malika Petersen:
But heres ,my glass half full moment, at least inflation isn't 20.7% like it was in January of 1986. Right.
Arthi Rabikrisson:
Yeah. Okay, I get you.
Malika Petersen:
But it's interesting to also note that this was preceded by interest rate of 22.15% in 1980.That's huge. And this highlights to usexactly why interest rates gets increased. In South Africa, the Reserve Bank has a group of people called the Monetary Policy Committee. Yes. And they're the strategy of inflation targeting specifically to avoid the kinds of situations that I just described. Will they agree? Yeah. So be the MPC or Monetary Policy Committee, as I just mentioned, have an inflation rate of low inflation target of between three and six percent. Yes. Now, the minute inflation is outside of that range, the repo rate is then used as a tool to influence spending, because we all spend less when we have it? Right? Yes, yes. And increased interest rates means that we all have less. So I think in this episode, we thought, given the time of year, and that we faced a period of increasing interest rates one very, very recently, as you all know, you our listeners, and subscribers would find it useful to help make sense of it. So we want to help you understand the drivers of interest rate, and how they impact us. And then what we could be doing at times, like these
Arthi Rabikrisson:
and that's why Malika, we're actually calling this episode in your best interest, because it's a bit of a play on words there. But I think I really liked that, right? It makes a lot of sense to me, that, you know, we start with what these concepts are, what's influencing them, how they affect us, because you know, as much as we are, the taker of this, I mean, we, we can't do anything to control this other than our habits. And we're going to talk a little bit about that. But let's also understand where this is coming from. Okay. So Malika, I love how you sort of explained that so easily for us and let me just add him get, you know, the repo rate everyone is, is actually the rate at which your central bank and of course, the team in there, the Monetary Policy Committee then thinks about how they're going to utilize that as a tool. But then the central bank, you know, uses its reserves, it loans out money to the commercial banks in South Africa, to the likes of your Capitec, your Standard Bank, it's all of the big names and smaller ones that we know. And this, everyone determines that rate of interest right, which the banks then lend to us, right as consumers. So that comes in the form of our loans and our different types of credit forms. So we're getting that we're paying the bank, the bank is paying, eventually the Reserve Bank. So you know, as you mentioned, Malika inflation targeting is that tactical tool that the SARB is using, and then let's understand also, what is causing our interest rates to be increased. Now, I know a four factors that actually drive the use of interest rates as a control mechanism and I think our listeners might be interested to know about it. And we've just mentioned one already. First one being inflation, okay. So in an expanding economy, that means our economy is growing, things are looking bright and rosy, us as consumers. I mean, I feel like I've got money to spend, I go out, I spend, I don't save I spend right. But I feel like I got more money in my pocket. So I do spend more. What that means then is that I'm demanding for more for more things, more stuff, more goods or services, I want more that increases. And often, my demand and all of our demand for these things, outstrips what's available out there, or the supply. Now let's use the example of avocados right? When avos are out of season, they're so much more expensive, oh my goodness, then when they are in season, this is because there's less avocados to be sold. And the same number of us wanting them, right? We want them we demand it. Therefore, everyone we end up paying that premium in order to get it. So companies also they increase the prices of the goods and services because when there's more demand, there's less supply, and therefore that price on top of it is what's causing that inflation to happen. Now imagine all of the companies in South Africa doing that Malika. Yeah.
Malika Petersen:
Absolutely. And I think I know what you're alluding to, and I think I know what the second driver can be.
Arthi Rabikrisson:
Okay, tell me Yes.
Malika Petersen:
So things that I like to invest in that makes me feel like a boss, which I've seen in the previous episode, it's stock market.
Arthi Rabikrisson:
100% Correct absolutely okay, tell us more, you know,
Malika Petersen:
I'm the boss of this one.So companies need to grow and develop, right? That is essentially the nature, the company, a company is in existence to make profitability, and they need to grow and develop in order to do that. And depending on how conditioned on the equity market, they expand by raising capital in the form of a corporate action, like an IPO or corporate bond, which we spoke about last time, when we were discussing the different types of asset classes, right? Yes, yes. When investor sentiment appetite is low, and companies can then opt to borrow from the bank. Now our stock market has been volatile since the pandemic to saythe least and more so recently, given some international gains, as well as all of the local challenges which we face. So it's most likely that companies have been borrowing more, because that's what they need to do. Yeah. And therefore, the financial institution have to borrow more from the Reserve Bank in order to fullfill this demand, espeically, if the rest of us are not depositing and saving. Right to be able to fund these loans, because you see, that's what our deposits and savings do. Right, the fund loans that the bank make, and the bank then makes a profit on the on the interest rate set. Ah, right. Right. Oh, this essentially creates an increased demand for money when increase demand for loans or credit. Yes. And there's not enough supply. Automatically, the repo rates will increase. And as a result, your interest rate?
Arthi Rabikrisson:
Ah, you've explained that so well, so Well, Malika, I mean, I've got, I've got that well done. You the boss definitely the boss one Alright, so if you want the third driver potentially, okay. And actually leading on from what you said, Malika, about international events, right? Now, remember, international events, we're talking about things like, you know, wars and terrorism and a whole host of other things, right. We have international investors, okay, in our market, as well. And when these events impact them, where whichever jurisdiction that they're in, it then also impacts their investing patterns into emerging markets like ours, right, be it our stock market and also in what we we normally know is the term foreign direct investment, everyone. So that is where you're getting that money coming in for like your big infrastructure projects, and even things like roads and, and municipal things, schools, hospitals, those types of things. And we know, as I said, all of these key events, I mean, we've we've had natural disasters happen recently, we've had so much of destabilization going on, it impacts these international investors in such different ways, you get jittery, so some of them will pull their money out, okay. Now, from a economies perspective, that dynamic shift of that money supply, you know, money coming in money going out, that becomes impacted. And as a result, our central bank has to respond to this, right. It's an inflows and outflows of money. So they respond to try and stabilize it and the interest rates is one way again, to do that.
Malika Petersen:
Ya, I like I like that you mentioned the central bank or reserve bank, because they are the key component here. In this process, right. Yeah. And I'm not sure if everybody's realized this before, but they often come to the aid of government, like us, and we forget, the government has expenses, right? It is expensive to run a country. It's expensive to maintain a country but particularly in South Africa, theres high social responsibility costs that government takes care of right. And this is what we call fiscal spend. And am I right Arthi, is this now the fourth driver, the fiscal deficit would be the fourth driver
Arthi Rabikrisson:
On the money Absolutely. On the money there, Malika. So we know as you've just explained, so Well, in South Africa, we have government spending, and at the moment, we have what is called a fiscal deficit, actually a deficit meaning a gap, meaning how much of a gap the government has between its own revenue, so its own income that's coming in from the form of the taxes that we pay from, from consumers from businesses, there's also other sources as well. And then the expenses that they have meaning we have the spending the money and typically, you know, we see this in the budget that's that's outlined every year, the interim and the annual budget. So to manage this deficit, right, this gap, which we currently have government borrows from the markets and sometimes borrows far more, than what amount of money actually comes in, and this absolutely causes loss They in other words, they have to pay this off. So they also have to be to ensure that this balance comes into play, and therefore your interest rates end up being pushed up.
Malika Petersen:
It's yeah, it's a lot going on there is alot going on, everybody. What we trying to help you understand here is that understanding these factors that affect interest rates impacts us right. Now, let's just recap for a second. Yes, the factors are inflation, yes, stock market, international investors, and then our fiscal borrowing prior. Yeah. And the impact of these and interest rates ripples across the us consumers and those of us who own businesses, or just in general, you had impact sustaining pattern,
Arthi Rabikrisson:
You right
Malika Petersen:
Standards of living, our abilities to repay things. So those of us who have any kind of loan, whether it be a home loan or bond, vehicle, finance, credit card, whatever it may be, right? Yeah, if you're paying interest on that, that interest is determined by the repo rate set, and we will experience an increase in those repayments. Similarly, companies have loans or overdrafts, they also experienced an increase in therexpensive, the as a result, the prices of goods have to go
Arthi Rabikrisson:
Yeah, this is it. This is it. Right? So what up, right? you're actually saying here, Malika is, there is a clear link between the rising or the falling of your interest rates, and then also your consumer and business, almost like a behavioral psychology. There's that link there, right? Because it just recapping what you're saying, when interest rates are rising, like we're experiencing in South Africa last week, we had an increase come through, which is it's impacting all of us businesses and consumers, it means we're going to actually reduce our spending this thing has that knock on effect of causing your company profits, so our side hustles earning so much anymore, the bigger businesses as well, the profits are gonna fall. And in especially for those companies who are now listed on our equity, Stock Exchange, ooh, those prices are likely going to drop, right? There's, there's a whole impact here. And then also, the converse would be true, right. So even in the case of decreasing interest rates, the opposite is going to happen. Right. Now, the spending aspect is actually what sticking out for me here, Malika and you know, on this one effect podcast, everyone listeners, we've spent quite a bit of time talking about budgets, and spending plans, as we like to call it, as well as money being left over after expenses, or saving.An increase now in these repayments and our debts, as well as paying more for goods or services. That's obviously going to impact our budget and as you said, Malika this impacts our standard and quality of life. So it's making me think then, what are some of the key things Malika that we can do as consumers to actually address this that's going on?
Malika Petersen:
Yeah, I think it was very interesting it early on when you say that sometimes government doesn't have enough money for fiscal spend and they go out and loan money. I was quite intrigued, because that's what what we do as consumers as well. Right. But I think it's important to understand that rates fluctuate and tactical plan is required to respond the reactively it sounds like. So tactically, we could cut luxury expenses, we could reduce travel, we can cook at home instead of out and then all those other good things that we spoke about in episode seven of the Swan Effect podcast
Arthi Rabikrisson:
Yes,
Malika Petersen:
but a more strategic plan is also needed. Right? And genuinely a good rule of thumb is to rather save for something we want than to use credit to buy now, because again, behavioral psychology aspect Arthi as it which I've known, talking about the choice, but we mentioned previously, so I know a little bit about it. It's called delayed gratification. Yes. Let me use an example for you the other day I visited a shoe store, because I needed new sneakers for walking because I'm on this whole new health vibe and lets see how long that lasts But yes, some of this whole new health vibe And the shop assistant asked me if I wanted
Arthi Rabikrisson:
It will last... to pay by card and naturally I had to got my debit card and I gave it to the shop assistant, my bank or my normal cheque bank card and gave it to the shop assistant and I'm the shop assistant activity but don't you want to use your store card? And I said what do you mean? And he said well, you can buy these on credit right? The sneakers nice. And I mean, they weren't cheap, right? So so I was thinking as soon as it in what year are you being serious? Right and he said yes absolutely. You can buy them, he said in fact, most South Africans or not most South Africans he said most of our customers buy that shop here shop with the the store card and buy their things, there good on credit now. I'm concerned that as a South African, we normalized the use of debt in this way. Yeah. Yeah. You know, it's making me think, right. I mean, that was just a pair of sneakers, what else are we doing in terms of the spends on a credit basis? Right? We're actually, we should be, as you said, thinking more strategically about how we can save up so we don't buy on credit. So we don't land up as we've mentioned in previous episodes, in such a quandary that we find it difficult to get ourselves out of it. Okay, so let's consider that the scenario you've actually just described, right? Where a person may actually be able to afford the repayments, okay, and they can pay off that pair of sneakers. Okay. And now we've just come off the back of two repo rate hikes Malikda, so that repayment and all whatever, whatever credit or whatever loans we've just taken, it's increasing. Man, our budget is actually under pressure, our personal budgets is under pressure. So repaying these sneakers which, you know, may already be worn and tattered and torn. I mean, we don't know what people's patters are in terms of use, it becomes a challenge. Right? Which now then brings me to another important rule of thumb, right? Never pay everyone, never pay for an item longer than that, which that item may last.
Malika Petersen:
Yeah, that's, that's important. That's a very good point that you must remember, we are aim is to start behaving and thinking like wealthy individuals, right? Yes, yes. And a wealthy individual would never take credit because, you know, we'll put something on credit and pay for it over a longer period of time that it was gonna last. Yeah. This this this this rulings true for furniture, it rings true for appliances, rather save up until you have enough to buy those things, then paying a five year or 10 year period, Now speaking about behaving and thinking like wealthy whatever. individuals, yes, in times of increasing interest rate, the wealthy start by ensuring that the balance sheet is in a good position. Right? See, and the way that they do this is that they ensure, that they do not have too much risk from exposure to interest bearing liability. The second thing that they do is look for opportunities for investment. This includes bonds, or any interest bearing instrument for that matter. In other words, the wealthy look for opportunity in the chaos.
Arthi Rabikrisson:
Oh, yes, you are so right about that. And, you know, everyone, we actually haven't up until now looked at what's the silver lining regarding higher interest rates, right. And here it is, when your interest rates are higher, it means the cash balances in your bank earns more money. And you know, as one of our one of our cable bank, actually markets is your money makes money babies. Right? So this is a that's the flip side of it. So while we've been talking all around the debt, here we are, we have an opportunity to actually earn more on our balances, right? So listeners, as tight as it may seem, okay, I think what we're saying here, but Malika and I is thinking strategically about saving in this climate, because it's going to be lucrative for you. And then shop around, you know, see where you can get the best rate for the best period of locking that you can stomach. I mean, I'm, I've recently been hearing a lot more adverts from quite a few different institutions, offering some really interesting products to get us into saving. So look at it, look at what your appetite is, look at what your so your spending pattern and look at what you have available to save. Be realistic, do that search. And as you said, Malika you know, that opportunity in chaos means the wealthy they're not panicking in these situations, are they?
Malika Petersen:
That's absolutely right Arthi in order for us to be able to look for the opportunity in the chaos, it means that we need to be pretty cool headed , we must be able to assess, and the ecosystem of support that we've spoken about before to give you the critical advice when you need it right. In remember, we speak about this often are now our podcasts. These are financial advisors, your coaches, your legal teams accountant, whoever that accountability person is, in these instances. It is again a behavioral and mindset shift and again, I'm talking about psychology, which I've no business doing whereby by to look for, or you know, the alternative, diligently instead of taking just taking what is served up.
Arthi Rabikrisson:
I actually think that's the exciting part Malika that we can actually shift our perspective everyone from you know that reactive is what you were saying on yes, there's a component of the tactical needs to happen, of course. But let's shift that right to a proactive one. So even when there's an interest rate hike, we're working the strategy, we're looking for the opportunity, because there always is that there's always opportunity. Malika, you know, once again, can we are running out of time, about a very, very interesting topic. I mean, I, it's so lovely to be able to share something because it's so topical at this point in time, it's impacting us. But in any case, I think we've covered a lot for all of our listeners. So as we coming to the end now, what would be your parting shot for our episode?
Malika Petersen:
I think it this time around my parting shot is really about the decision that we take in good times. And the fact that they influence the way in which we are able to weather any storm, right? When you have a good financial plan and we follow that up with deliberate action, our journey to financial freedom can really be affected by the bumps in the road, like rate tax for example. What about you Arthi any closing thoughts from your side?
Arthi Rabikrisson:
You know, I believe if we have that layered and flexible approach to thinking about our finances, and our financial decisions, it'll actually leave us feeling less pressured, even in these difficult times. So listeners, subscribers, you've set yourself up for success with knowledge gathering through podcasts like ours, and a whole host of other materials we've mentioned them previously, have your support in place and we've just mentioned some of those accountability partners now as well. Keep an eye on where your money is going from both the saving and spending perspective and then just ask yourself what can I do from here? And you know what I guarantee you may be pleasantly surprised on what types of ideas can come up yeah,
Malika Petersen:
That is that's true it I think when we pause for thought and bring resources in
Arthi Rabikrisson:
years that's absolutely it. We are flexing the financial muscles in our brains.
Malika Petersen:
A brain work out
Arthi Rabikrisson:
Oh, yeah.
Malika Petersen:
Yeah, it make it's making me think of that brain cartoon character during Dadeville
Arthi Rabikrisson:
Oh, yes. Is the is that that character, the one of the brain and the heart I've forgotten the name. And the brain is always working out. And you know what, the heart always shows it up?
Malika Petersen:
Well I can see why
Arthi Rabikrisson:
Yeah,
Malika Petersen:
When it comes to the heart of the matter, even the brain has to be challenged, right?
Arthi Rabikrisson:
Absolutely. So too challenging the brain from the heart and everwhere else to. Thanks so much Malika Chao
Malika Petersen:
Bye Arthi Sharing is caring,
Arthi Rabikrisson:
and knowledge is power.
Malika Petersen:
Time for you to be daring
Arthi Rabikrisson:
and let your money confidence bloom like a sunflower.
Malika Petersen:
Thanks for joining us. We hope you found these ideas and guidance useful.
Arthi Rabikrisson:
Do subscribe share and write a review or send us comments we would love to hear from you.
