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REAL INTEREST RATES STILL HIGH (Personal Finance October 1999)

The recent drop in interest rates is certainly good news, but before rushing out and incurring debts consumers should take stock of real interest rates. Whereas the interest rate quoted by banks is only a nominal rate, the real rate is arrived at by subtracting the inflation rate from the quoted or nominal rate. The resulting real rate is the "true" rate at which it costs you to borrow.

The following graph and table , which shows the inflation rate, nominal interest rate and real interest rate over the past 15 years reveals some interesting, yet unknown facts. Firstly, back in the 1980s when South Africa had high inflation how many people knew that in 1986, 1987 and 1988, it paid to borrow money. In these years the inflation rate was higher than the nominal interest rate resulting in a negative real interest rate. This type of situation is rare.

More common is the present situation - where the inflation rate over the past few years has dropped fairly dramatically and the interest rate has simultaneously increased. When interest rates hit their peak last year South Africa probably had one of the highest real interest rates in its history, certainly the highest in the world at that time. Although some other developing countries had much higher nominal rates, these were offset by inflation rates much higher than that of our domestic economy.

Even though nominal interest rates have turned downwards - it can be seen that by historic standards we are still experiencing very high real interest rates. Consumers should avoid incurring unnecessary debt at these high real rates and those people planning to make investments should always consider paying off their own debts first. There are very few investments (if any!) which will offer the same after-tax real return with so little risk. comment

RATES FOR THE PERIODS AS AT 1 JANUARY
YEAR INFLATION PRIME INTEREST RATE REAL INTEREST RATE
1984 11 20 9
1985 13 24 11
1986 18 17 -1
1987 18 12 -6
1988 15 13 -2
1989 13 18 5
1990 15 21 6
1991 15 21 6
1992 16 20 4
1993 10 17 7
1994 10 15 5
1995 10 16 6
1996 7 19 12
1997 9 20 11
1998 6 19 13
1999 6 23 17

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