By Helmo Preuss
Increased competition is squeezing the interest rate margin as the weighted overdraft rate dropped to 9.06% in April from 9.85% in October‚ while over the same period the 12-month fixed deposit rate rose from 5.67% to 5.81% according to the BAT9602m data submitted by the commercial banks to the South African Reserve Bank (SARB).
The decline in the overdraft rate means that on average it is cheaper for companies and individuals to borrow now than it was in October‚ even though the SARB has not changed the repo rate since November 2010.
There is some debate amongst economists as to whether central banks should focus on the lending rate‚ which is what commercial banks charge consumers and therefore impacts on demand‚ or on the policy rate‚ which is what the central bank charges commercial banks.
The SARB said in its January Monetary Policy Committee (MPC) statement as the real (nominal minus the year on year (y/y) consumer inflation rate) repo rate was negative‚ monetary policy was currently “accommodative” implying that one should not expect any further repo rate cuts. If however the focus is on the real average weighted overdraft rate‚ which is what commercial banks charge companies and individuals‚ then the SARB has space to cut it further as the real overdraft rate is currently around 3.0% and it bottomed at 1.8% in August 2008.
The weighted overdraft normally reflects competition between banks‚ their lending standards and demand for credit. Prior to September 2008‚ commercial banks were offering prime (normally 350 basis points above the repo rate) minus 100 basis points (1%)‚ but for most of 2009‚ the weighted average overdraft was 200 basis points (2%) higher and in July 2010‚ the weighted average overdraft rose to a 504 basis points (5.04%) margin over the repo rate. In October 2011 this margin was 435 basis points (4.35%)‚ but this dropped to 356 basis points in April 2012.
The last time the real repo rate was in negative territory was in 2008 when a rising repo rate could not keep pace with surging inflation. In the 2008 episode‚ the real repo rate was negative for six consecutive months with a bottom of a negative 1.7% in August 2008‚ the month after most commodity prices peaked.
The real overdraft rate by contrast did not turn negative in 2008 as it bottomed at a positive 1.8% in August 2008.
The high real overdraft rates in 2009 and 2010‚ in some months going above 7%‚ is why consumer demand was so weak in those years.
The Monetary Policy Committee (MPC) said it is “cognisant of the slowing domestic economy and feels that given the lack of demand pressures‚ monetary tightening at this stage would not be appropriate. At the same time‚ the nominal policy rate is at a long-term low and the real policy rate is slightly negative‚ indicating a monetary policy stance that is accommodative and supportive of the real economy. The MPC maintains a preference for a stable interest rate environment given the conflicting pressures on monetary policy at this stage”.
