SA Reserve Bank reviews prime rate used for mortgages and loans

South Africa’s central bank is reviewing the “prime” lending rate benchmark used by commercial banks to price a wide range of credit products, including home loans, but economists and banking industry groups say the move is unlikely to translate into cheaper borrowing for consumers.

The South African Reserve Bank (SARB) said in mid-January that it is working on the prime lending rate, a long-standing reference point used across the banking system. Prime has been set at 3.5 percentage points above the repo rate since 2001, a convention designed to support the “transmission” of monetary policy into broader lending rates as reported by Bussiness Tech.

In practice, most borrowers do not receive prime itself, but a personalised rate quoted as “prime plus” or “prime minus”, depending on factors such as funding costs, risk appetite and the borrower’s credit profile.

Krutham managing director Peter Attard Montalto described prime as a historical “hangover” and said a review is overdue, arguing that reform could improve market functioning. But Krutham executive chair Stuart Theobald said the review is not aimed at narrowing the repo–prime spread meaning prime-linked debt is unlikely to become cheaper as a direct result of the exercise.

Theobald argued that prime is a widely understood reference point rather than a mechanical pricing rule, and that banks already price loans around it using a range of inputs beyond the repo rate, including competition, statutory capital requirements and the overall cost of funds. He also noted that banks’ funding costs are not determined only or even mainly by repo borrowing from the SARB, given the role of deposits and other market funding sources.

Possible outcomes discussed by analysts include shifting conventions toward “repo plus X” rather than prime, or formalising parts of the current spread to reduce the risk of future deviation. Banking industry group BASA said changes to the prime benchmark “should not” on their own change the cost of loans, because lending rates are ultimately set by bank funding costs, risk and borrower credit profiles.

Source: Bussiness Tech