No reason to change spread between repo, prime rate study finds

Thursday, April 8, 2010

Pretoria- There is no reason to change the current fixed spread between the repo and the prime rate, both the Reserve Bank and the Banking Association of South Africa (BASA) announced on Thursday.

"It is concluded that there are no compelling reasons to change from the current fixed spread of 350 basis points between the repo and prime rates. It follows therefore that there should be a single prime rate for all banks," the central bank and the association said in a joint report.

The conclusion follows on the study released as a result of a technical sub-committee established by the then Governor Tito Mboweni, executives of the country's five large banks and BASA at a meeting last May.

The study found that the size of the spread between the two rates is immaterial to the setting of lending rates. This is as prime is mainly used as a reference rate for benching loans.

"Any change in the spread or a change in the benchmark rate will not change the methodology for establishing actual bank lending rates, although it could cause some short-term problems and disruption with existing agreements," said the parties.

The two said that a uniform spread helps to create a competitive environment for banks, which allows customers to choose between products as well as negotiate interest rates based on their credit profile.

BASA and the Bank also suggested that because lending rates differ significantly from prime at times, the Bank should closely monitor trends in banks' actual lending and deposit rates.

"This would ensure a better assessment of the market forces that drive the pricing of loans, and the extent to which these forces offset or reinforce the monetary policy stance of the bank," they said.