South African Reserve Bank Governor Lesetja Kganyago say he favours ending the use of prime, the main reference rate commercial banks use to price trillions of rand of loans to clients.<\/p>\n\n\n\n
\u201cWe would like to have much more transparency, so that consumers know what is actually going on,\u201d Kganyago said in an interview on Wednesday on NewzRoom Afrika from the World Economic Forum in Davos, Switzerland. <\/p>\n\n\n\n
The central bank is undertaking a study to review the rate, and \u201cthe most natural outcome would be that we just get rid of prime,\u201d he said.<\/p>\n\n\n\n
The central bank confirmed earlier this month that it is reviewing the rate that has been fixed at 350 basis points above the country\u2019s monetary policy rate since 2001.<\/p>\n\n\n\n
Lenders typically price loans using prime as a reference, with premiums or discounts relative to it depending on the cost of funding, risk appetite, and the creditworthiness of clients.<\/p>\n\n\n\n
The central bank\u2019s benchmark repo rate is currently 6.75%, with prime at 10.25%. <\/p>\n\n\n\n
The SARB’s monetary policy committee meets next week to review it, with economists anticipating a hold on rates at current levels, with a small possibility of a 25 basis point cut.<\/p>\n\n\n\n
Analysts and market experts at Krutham have welcomed the move to review the use of prime, noting that it is a “bizarre hangover” from the past.<\/p>\n\n\n\n
Krutham managing director Peter Attard Montalto said that reviewing the rate is long overdue, and removing it would have a positive impact on markets.<\/p>\n\n\n\n
Before it came into effect in 2001, lenders had more flexibility and banks in particular determined their own interest rate spread above prime.<\/p>\n\n\n\n
However, according to Krutham chair, Dr Stuart Theobald, this also caused some discord between the central bank and lenders when certain banks did not adjust their rates in line with monetary policy.<\/p>\n\n\n\n
“This went down pretty badly at the central bank, and there were stern words with those bank executives, and they fell in line. Everyone has stayed in line since,” he said.<\/p>\n\n\n\n
While the prime review is a positive step, Theobald stressed that the impact is unlikely to be what consumers would hope for.<\/p>\n\n\n\n