Monetary policy at a glance
New interest rate proposals by the department of trade and industry (the dti) will fundamentally change the way in which the SA Reserve Bank indirectly sets maximum interest rates in the entire consumer credit market, including home loans, with its all-important repurchase (repo) rate.
This is happening just as South Africa enters an upward cycle in interest rates after the repo rate reached a low point of 5.5%. The dti is in effect planning to make the looming repo rate increases less powerful as a determinant of interest rates faced by consumers.
It currently works as follows: The maximum legal interest rates in South Africa are set according to a formula based on the repo rate. Every 1 percentage point hike in the repo rate makes all the legal maximum interest rates in the country rise by 2.2 percentage points.
The dti’s proposal is that a 1-point hike in the repo rate makes the legal limits go up by only 1.7 points.
For the largest debt market, mortgages, the proposal is more extreme: every 1 point of repo rate increase will translate into only 1 point in the maximum rate.
This will in effect reduce credit providers’ ability to pass on the soon-to-rise cost of capital to consumers paying the highest rates.
The effect of this on banks and other credit providers can become spectacular if the repo rate goes back up to anything like the 12% it reached in 2008.
According to the National Credit Regulator’s Lebogang Selibi, the proposals “are meant to support monetary policy” and the lowering of the effect of the repo rate on maximum rates has been proposed before to make monetary policy less pro-cyclical.