Real interest rates: Save or Spend?

What you see is not what you get
Real interest rates are nominal interest rates which are adjusted for inflation.
Phillepus Uusiku
Before one takes a decision to save or invest, it is very important to take real interest rates into considering as there could be an incentive to spend the money now, analysts say.

Real interest rates are nominal interest rates which are adjusted for inflation and give individuals an indication of time preference because money loses value over time due to inflation.

Therefore, real interest rates are positive when interest earned on savings is above inflation. In addition, real interest rates are negative when interest earned on savings is below inflation. The latest figures by the Namibia Statistics Agency (NSA) indicated that inflation came in at 7.1% in October 2022 and averaged 5.9% year to date.

According to the Head of Research at Cirrus Capital Robert McGregor, if savers are seeing negative real rates, then they are in fact losing purchasing power on these investments. If real interest rates on savings are positive, this should incentivize saving or investing rather than spending.

The Head of Research at IJG Securities Danie van Wyk also concurred with McGregor’s views. “When real rates are low, income usage will generally shift from saving to consumption, and investment in physical goods should increase. On the contrary, when real rates are high, the usage of income will move from consumption to saving, as fewer people or businesses are willing to take out loans, due to it being more expensive. High real rates are favoured by investors and savers, as it means that the growth of their money outpaces inflation, and increases their purchasing power,” van Wyk said.

Independent local analyst Josef Sheehama noted that “when shopping for a loan or a savings account, you will often see nominal interest rates displayed in the banking hall. The bank displays the amount of interest paid or earned before taking inflation into account.”

“When it comes to interest rates, it is important to remember that what you see is not necessarily what you get. Understanding which interest rate you are looking at is key to making the most of your money,” Sheehama said.


On the other hand, real rates are also a consideration for borrowers, McGregor said. If borrowers are facing negative real interest rates, they are theoretically incentivized to borrow money as inflation is helping them repay their debt. However, banks will be receiving a negative real interest rate and thus less likely to lend. If more people borrow money to spend it, then that could also have an impact on inflation. Again, this is something that inflation-targeting central banks like the South African Reserve Bank (SARB) consider when setting monetary policy, McGregor pointed out.

“When real rates are very low or negative, it’s a good time to take a little risk and borrow money. When real rates are higher, it becomes costly to borrow.The real interest rate is generally of more use than the nominal interest rate. Everyone wants the maximum returns possible from their loans or investments,” Sheehama emphasized.

In 2022, the Bank of Namibia (BoN) increased the repo rate by 300 basis points to 6.75%. The prime lending rate currently stands at 10.5%. Using October’s inflation figure of 7.1% and the prime lending rate of 10% in the same month, the real prime lending rate was 2.9%.

In period of high inflation many central banks have hiked their policy rate to levels above inflation, which should encourage saving and discourage borrowing, thereby helping reduce demand in the economy and eventually causing inflation to slow down, McGregor added.

Since 2000, the real prime rate in Namibia has remained positive. Despite the higher inflation environment now, the sharp repo rate hikes have seen Namibia’s real prime rate increase again after bottoming in July this year. The October 2022 real prime rate of 2.9% is nearly half the long-term average of 5.7%, McGregor [email protected]