South Africa’s central bank wants to scrap the prime lending rate

South Africa’s central bank wants to scrap the country’s prime lending rate as soon as next year to make ​its main monetary policy rate the reference point ‌in financial contracts, a discussion paper released by the bank shows. There was a widespread misconception that the prime rate was the base rate ​for loan pricing and the fixed spread contributed to excessive bank profits, whereas lending rates were ⁠determined by factors like bank ⁠funding costs and risk appetite, it added. The ​central bank “prefers that the use of the Prime Lending ​Rate as a reference rate ceases.

Instead, (it) should ‌be replaced with the … policy rate”. The prime lending rate was intended as a base rate for pricing credit above the SARB’s policy rate. It is currently at ⁠10.25% and the repo rate at 6.75%.

The change would create a clearer link between monetary policy decisions and lending ⁠rates and make ‌it easier for consumers to understand ⁠how banks price their loans, the discussion ​paper ‌said. It is estimated that more than ​3.2 trillion ⁠rand ($199.5 billion) of contracts are linked to the prime rate, so moving away from it should be done carefully and in 2027 at the earliest, the paper said.