JOHANNESBURG, Feb 17 (Reuters) – South Africa’s central bank wants to scrap the country’s prime lending rate as soon as next year to make its main monetary policy rate the reference point in financial contracts, a discussion paper released by the bank shows.
The South African Reserve Bank (SARB) said in the paper that the prime lending rate’s role had become “largely administrative and detached from its original purpose”, as shown by the fact that it had been fixed at 350 basis points above the policy rate since 2001.
There was a widespread misconception that the prime rate was the base rate for loan pricing and the fixed spread contributed to excessive bank profits, whereas lending rates were determined by factors like bank funding costs and risk appetite, it added.
The central bank “prefers that the use of the Prime Lending Rate as a reference rate ceases. Instead, (it) should be replaced with the … policy rate”.
The prime lending rate was intended as a base rate for pricing credit above the SARB’s policy rate. It is currently at 10.25% and the repo rate at 6.75%.
The change would create a clearer link between monetary policy decisions and lending rates and make it easier for consumers to understand how banks price their loans, the discussion paper said.
It is estimated that more than 3.2 trillion rand ($199.5 billion) of contracts are linked to the prime rate, so moving away from it should be done carefully and in 2027 at the earliest, the paper said.
($1 = 16.0386 rand)
(Reporting by Kopano Gumbi;Editing by Alexander Winning and Emelia Sithole-Matarise)
Comments