Tito Mboweni has questioned why the prime rate of banks follows the repo rate so closely. And now the DA raises the same question:
Given that funds from the Reserve Bank make up only a small portion of lending banks' funding, the point seems valid on the surface. But I have a horrid suspicion that once Tito and Dion have thought this through a bit they're going to be sorry they ever raised the subject, especially right now.There is no reason why bank lending rates should remain constant over time, the Democratic Alliance said in a statement on Wednesday.
"There is no reason why the 3.5 percent difference between the repo rate and the interest rate that banks charge consumers should remain constant over time, or across the entire banking sector," Dion George, the shadow finance minister said.
full story from Business Report here
First of all the fact that prime tracks the repo means that when Tito decides to influence the economy through a repo rate change his influence extends directly into the economy. You'd think Tito would like that idea. He is certainly going to get hopping mad if he reduces the repo rate and the banks don't follow suit. If the banks don't take their cue from the Reserve Bank, the effect of Reserve Bank intervention can only get diminished.
And at this point I can hear a cheer from some quarters, but this tale isn't over yet.
The truth is that when it comes to actual lending rates provided by the banks, prime is only a reference point. Two years ago getting asset finance at below prime was a fairly regular occurence. Try to get a rate below prime now!
The market is affected by supply and demand, and right now funding for loans are in short supply. Tito & co might want rates to go down to stimulate the economy or ease debt burdens, but in the open market place the pressure is to bid up to get the money you want. If the prime rate floated off the repo right now it would probably head up, not down!
With a substantial chunk of existing loans' interest rates linked to the prime rate, I don't see this being in the interest of over-indebted consumers, especially right now.
Good luck with that meeting on Thursday, Tito. But if the gap between repo and prime widens, I'm not going to be thanking you.