Sarb: prime rate to repo rate spread immaterial

A report published on Thursday by the South African Reserve Bank finds the size of the spread between the repo and prime rates is immaterial to the setting of lending rates, as the prime rate is primarily used as a reference rate or benchmark for pricing loans.

The repo rate is the central bank's benchmark rate

The report follows discussions on the spread between the repo rate and the prime rate at a meeting held on 21 May 2009 between the governor of the Reserve Bank, executives of South Africa's five largest banks and the South African business community.

According to recent studies, the Reserve Bank's direct influence on the average funding cost of banks has diminished over time as t the money market has failed to keep pace with the growth in banks' consolidated balance sheet over recent years. This diluted the direct influence that the repo rate has on banks' average cost of funding.

However, the paper finds while this may cause some short-term problems and disruption with existing agreements, any change in the spread or benchmark rate will not change the methodology for establishing actual bank lending rates.

The Reserve Bank concludes that there are no compelling reasons to change from the current fixed spread of 350 basis points between the repo and prime rates as the uniform spread helps to create a competitive environment for banks and enables customers to choose between products and negotiate interest rates based on their credit profile.

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