When interest rates rise, most people feel the financial pinch as repayments for home loans, car purchases or personal loans increase. This leads to less money for everyday spending and tightens the household budget.
Middle- and upper-income households tend to hold secured debt such as property, which builds wealth. Lower-income households are pushed into debt as they try to maintain their consumption levels. The result is that the impact of rising interest rates is even more significant for lower-income households. They may have to reduce spending on necessities to service interest payments. Even renters wanting to become home owners are indirectly influenced by rising interest rates, as home loans become less affordable.
Banks make money by charging consumers who borrow money while paying out little interest to those holding savings accounts. And most household debt is owed to the banking sector.
According to the World Bank, most African countries fall into the low- to middle-income bracket. In many of these economies, consumers tend to leave their cash sitting in transaction accounts because they are convenient, familiar and easy to access. While moving money out of transaction accounts and into savings products can offer a better return, most people tend to stick to what they know. And banks actually count on this “inertia”.
Whether it’s staying with the same bank out of habit or ignoring new investment products, that lack of movement is a huge win for the bank’s bottom line.
But there is an opportunity to gain from rising rates by moving excess funds into interest-earning financial products. Examples include:
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term deposits (a type of savings account that allows you to deposit a lump sum of money for a fixed period, with a guaranteed fixed interest rate)
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tax-free savings accounts
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bonds (a loan you make to the government or a company, giving you regular interest payments for a set period and your original investment in full at the end of the loan period).
Collectively these kinds of investments are known as fixed interest securities. They earn interest income in proportion to the amount you deposit. And the capital you deposit in them remains protected from fluctuations in the market.
If you access the funds, the amount of interest you earn will reduce proportionately.
As with any financial decision, it’s important to speak to a professional financial adviser to see which product best aligns with your needs and financial situation.
These kinds of financial instruments can earn you interest income. They won’t, however, outperform the returns you can get from more risky securities like shares. What they will do is allow your money to work for you in ways that money in a transaction account won’t.
And a guaranteed interest income from a fixed-interest investment is more attractive than zero return earned on a transactional account.
Making the most of rates rises in three steps
Firstly, get rid of the surplus in your transactional account.
There’s a common expression in the world of finance:
Idle cash doesn’t generate returns.
This implies that money that is dormant doesn’t grow. If you have excess money in your transactional account, consider how much you can comfortably afford to transfer into a term deposit, tax-free savings account or bonds.
By moving these funds into an interest-earning account, you turn your stagnant balance into a defensive asset that grows with time, shielding your portfolio from negative shifts in the economy.
Secondly, accept that you’re playing the long game.
To make the most out of interest-bearing investments, you need to commit your funds for a year or longer. Longer investment terms typically offer higher interest rates, rewarding you for keeping your money invested. The power of compounding is also on your side as the money you earn from an investment is added back into your balance, and then that new, larger amount earns even more interest. Therefore, with a longer investment period, you aren’t just earning interest on the initial capital. You will begin to earn interest on the interest too. Longer durations can protect you from future interest rate drops by locking in today’s peak interest returns.
Thirdly, look beyond the big banks.
While it’s easy to keep track of your finances when all your funds are with the same bank, consider the investment products offered by alternative or smaller banks. Alternative banks can offer better interest rates to attract more customers. As more consumers explore different investment options, this challenges the “Big Banks” to be more competitive with their rates and product offerings.
By taking action and moving your money, you aren’t just helping your wallet, you are also forcing the banking sector to be more competitive.
When central banks raise interest rates, debt holders feel the impact instantly. But higher rates also create an opportunity that’s easily overlooked. If you can put your money to work in interest-earning investments, those same rate rises can start working for you instead of against you. What feels like bad news on one side can quietly become a source of passive income on the other. It just depends on where your money is sitting.