The upside of rising interest rates

Elize Giese, Head of Investments at FNB Business.

Every decision on interest rates results in conflicting views. A rate hike is regularly met with criticism by those who are concerned about debt management while a reduction equally faces disapproval by those who monitor the local currency and inflation.

According to Elize Giese, Head of Investments at FNB Business, “an important factor that is often overlooked is the opportunity to promote South Africa’s savings culture during an upward rate cycle. South Africa continues to grapple with a savings rate that is significantly lower than 20%, therefore, we should maximise every possibility to build a savings culture.”

Giese says the message of savings and investments is equally important to small as well as big businesses, as they need to mitigate the persisting uncertainty of the local or global economy.

“The state of our local and global economy has never been the same since the global economic recession of 2008. It is important for businesses, big or small, to save or invest some money and earn interest in anticipation of a rainy day. More importantly, a savings or an investment plan could negate the need to secure a business loan for short-term financial constraints. Businesses which have already started saving are likely to reap better returns over the course of the year as economists are predicting an upward rate cycle in the short-term,” she adds.

During the launch of the 2015 Savings Month, the Ministry of Finance highlighted that South Africa’s aggregate saving has been on a declining trend because of the decline in corporate and household savings. Savings by the corporate sector represents the bulk of total saving, but the corporate savings ratio has fallen in net terms from 6.6% of GDP in the 1980s, to 5.6% in the 1990s and to only 3% between 2000 and 2008.

“The need to build a culture of saving is not only necessary to the country’s economic wellbeing; it can make a significant difference to business sustainability. Over the last decade, banks have introduced a number of savings and investment plans which offer great returns to clients who are committed to saving. It is important for individuals and businesses to start making use of the available opportunities and fully embrace a culture of saving.