Observations on interest rates in South Africa

Presentation by Dr Monde Mnyande, Advisor to the Governor and Chief Economist, South African Reserve Bank, to the Ombudsman for Banking Services, 22 April 2010

Most borrowers and savers would benefit if interest rates do not fluctuate excessively. Stable interest rates would bring greater certainty to the finances of savers and borrowers and assist them with planning. This is not to deny that some persons and institutions, such as those actively trading interest-bearing debt securities and interest rate derivative instruments, may prefer a fairly volatile interest rate environment. But for typical economic agents this is not the case.

Furthermore, from a cash-flow point of view it is also helpful if nominal interest rates are lower rather than higher. In this matter, however, sustainability is important: a very low interest rate environment which cannot be sustained and has to make room for a high interest rate environment is extremely damaging, particularly to borrowers.

Lower nominal interest rates can only be sustained if inflation is kept in check. Otherwise negative real interest rates will result as inflation accelerates with low nominal interest rates being maintained. Negative real interest rates are damaging to the economy, not least since such rates cause savers to subsidise borrowers, thereby undermining saving.


The repurchase rate or repo rate is the interest rate at which the SARB routinely lends funds to banks with a temporary cash shortfall, recent monetary policy decisions have brought the real repurchase rate to low (but still positive) levels of .74 per cent. This rate comes from the most recent high point of 6,64 per cent recorded in November 2008. One should remain cognisant of the fact that it is preferable to use a forward-looking measure to capture inflation expectations when estimating real (or inflation-adjusted) interest rates.

In recent weeks the margin between the SARB’s repo rate and the prime overdraft rate has attracted some attention in the media. It should be clearly noted that this margin is based on convention, not regulation. With a review of, and change to, the structure of money-market interest rates almost ten years ago, the margin between the SARB’s repo rate and the prime overdraft rate was widened from 300 to 350 basis points on 5 September 2001. This is still the margin today, with the repo rate at 6,5 per cent and the prime rate at 10 per cent.

As indicated above, the magnitude of this margin is essentially a convention or an understanding between the SARB and the private-sector banks. Is it anticompetitive behaviour? Defnitely not along the lines of collusion as some sceptics have argued. It should be noted that banks price each individual’s advance mindful of the risk, administration cost and the cost of obtaining funding, at a rate that is expected to be profitable for the lending institution.

If the margin between the prime rate and the SARB’s repo rate is reduced to 300 basis points, initially all existing prime-linked advances will carry a lower interest rate. However, this would not last. Each individual’s advance will be reviewed over time and the lending rate raised again, because the underlying risk, administration cost and funding cost would not have changed, unless, of course, deposit rates are also reduced by 50 basis points, which is unlikely to be favourably received by savers. A general realignment of all deposit and lending rates relative to the repo rate would then be implied.

Read the full presentation.