The Repo Rate (short for the Repurchase Rate) is the rate at which banks in SA borrow money from our Reserve bank (this is SA’s central bank that is responsible for the money supply). The Repo Rate is currently at 5.5% meaning whenever a bank in SA needs to borrow money they will pay 5.5% interest on top of the amount to the reserve bank.
The Prime Rate is the rate at which private banks will lend out to the consumer. Naturally this rate will always be higher than the repo rate so that banks can make a profit when lending money out. Currently our prime rate is at 9%.
Interest rates play a vital role in maintaining a healthy economy due to the the fact that so many people rely on lending to fund their lifestyle, education, houses and cars etc., but as soon as interest rates become too high, people will not only be less inclined to take on new debt and spend money, but will start to default on their present debt which has a contagious negative effect through the economy which can cause massive job losses and high unemployment.
On the other side of that coin, low interest rates are just as dangerous as they cause people to take up too much debt and spend more than they should. When a large portion of the population starts spending too much money this increases the demand for goods and services and causes the prices of these products to increase quickly. This is how unsustainable inflation can occur and our inflation in SA has been creeping up over the past few years so you can see from this how the reserve bank has a tough job of maintaining the delicate balance in our economy by controlling the interest rates.