South Africa’s real prime rate increased by 100%

Prominent South African economist Roelof Botha has slated the plan to do away with the prime rate as a distraction from the real problem.

This followed the South African Reserve Bank’s (SARB’s) proposal to phase out the prime lending rate (PLR).

The central bank published a consultation paper on discontinuing the PLR and designating the repo rate as a replacement rate.

For decades, South African banks have used the prime rate as the benchmark for loans like bonds, car finance, and credit cards.

Currently, the prime rate is administratively fixed at 350 basis points, or 3.5%, above the SARB’s repo rate.

The SARB argues this middleman rate has become a redundant administrative relic that obscures how loans are actually priced.

Instead of quoting interest as ‘Prime + 2%’, banks will eventually quote loans as a margin directly above the repo rate.

The SARB wants consumers to see exactly what the base cost of money is and what the bank is adding for risk and profit.

The transition is still in its early stages and will be carefully managed to avoid disrupting the trillions of rands in existing contracts.

The Reserve Bank’s consultation paper is a first step to begin formal talks with banks and stakeholders.

The central bank indicated that the transition would likely begin at the earliest in 2027 to give all stakeholders a chance to adapt.

The Reserve Bank made it clear that this change is not intended to make loans cheaper or more expensive.

Consumers’ risk profiles will remain the same. The only change will be the labelling of the interest rate they pay.

Economist Roelof Botha responds

Botha told Newzroom Africa that there is nothing wrong with the current prime rate system, which has worked well for decades.

He viewed the proposal to replace it as a smokescreen designed to deflect attention from the SARB’s restrictive monetary policy.

Botha said that while the nominal prime rate is 10.25%, the real prime rate has doubled since the tenure of former Reserve Bank Governor Gill Marcus.

The real prime rate is the nominal prime interest rate in a country adjusted for inflation. It therefore fluctuates with the prime rate and inflation.

While the nominal rate is what you see advertised by banks, the real rate tells you the actual cost of borrowing or the yield of lending in terms of purchasing power.

Botha said the average real prime rate was 3.4% under Marcus but is now around 6.8%, meaning borrowers are effectively paying twice as much interest.

“When the previous Reserve Bank Governor, Gill Marcus, was in charge between 2009 and 2014, the real prime rate was 3.4%,” he said.

“Today, the average real prime rate is 6.8%. It is a 100% increase from when Gill Marcus was running the Reserve Bank.”

He explained that this means homeowners and others with credit pay twice as much interest on their financing.

Botha insists that the primary burden on the economy is the repo rate set by the Reserve Bank, not the prime rate.

He believes the repo rate is at least 250 basis points above where it should be, given there are no signs of demand-side inflation.

Botha argued that the high cost of capital, driven by these rates, is severely damaging the construction sector and failing to aid job creation.

He views the scrapping of the prime rate as a technical distraction that fails to address the underlying high cost of borrowing in South Africa.