The four main South African banks will increase the prime lending rate to 11%, in line with the repo rate hike Reserve Bank governor Tito Mboweni announced on Thursday.
The prime overdraft rate at Absa, Nedbank and Old Mutual Bank will rise by 0,5 percentage points — from 10,5% to 11% — with effect from Friday.
First National Bank’s prime overdraft rate would go up next Monday, while that of Standard Bank would rise next Wednesday.
Mortgage rates for new business at Absa would also rise to 11% on Friday and for existing business, the rates would increase on Monday, the bank said in a statement.
Nedbank and Old Mutual Bank would increase mortgage rates on new home loans on Friday, and on Monday for existing home loans.
Interest rates on new and existing home loans at FNB would go up on Monday, FNB chief executive Michael Jordaan said in a statement.
Standard Bank’s mortgage rates would increase on Wednesday, in line with the bank’s prime overdraft rates, the bank said in a statement on Thursday.
Pick ‘n Pay Go Banking has also announced a 50-basis points rise in the prime overdraft rate from 10,5% to 11% with effect from Friday.
The increase from the banks was announced shortly after Mboweni increased the repo rate — the rate at which the Reserve Bank lends money to commercial banks — by 50 basis points to 7,5% from 7%.
”On the basis of the detailed analysis of the economy … the MPC [monetary policy committee] has decided that the moderate adjustment in the repo rate is warranted at present,” Mboweni said in Pretoria.
Factors that influenced the decision were uncertainties about the future movements of United States interest rates, rising oil prices, South Africa’s growing domestic debt and a widening in the current-account deficit of the balance of payments.
”Compared with the previous forecast of the Bank, the latest forecast shows a marked deterioration in the inflation outlook, particularly in the short term,” he said.
CPIX inflation was expected to peak at 6,2% in the first quarter of 2007 and then moderate to reach 4,8% by the end of 2008.
”The main reason for the deteriorating outlook is a significant upward revision of the international oil price assumptions.”
Mboweni said the International Monetary Fund expected world inflation to decline from a projected 3,8% in 2006 to 3,5% next year.
Consumer indebtedness also increased and in the first quarter of 2006 the ratio of household debt to GDP rose to approximately 68%, compared with 65,5% the previous quarter. The cost of servicing the debt remained ”fairly stable” at around s7%.
Weak growth in exports and higher volumes of crude-oil imports contributed to a continued widening in the deficit on the current account of the balance of payments in the first quarter of 2006.
”The widening deficit has nevertheless been more than financed by capital inflows. These inflows enabled the bank to further increase its holdings of foreign-exchange reserves,” Mboweni said.
On the international front, uncertainties in the financial and commodities markets added to the inflation risk.
Democratic Alliance MP Ian Davidson said the Bank’s decision did little more than affirm his party’s belief that government should be more proactive in managing the South African economy.
”Although it is more severe than we expected — especially given our benign inflation outlook — the DA did expect a pre-emptive increase in the interest rate given the current preoccupation with the current-account deficit.
”The DA shares the disappointment of the South African consumer about the imminent rise in interest rates …,” Davidson said.
The African Christian Democratic Party said that while it appreciated Bank’s dilemma, it was regrettable that its decision was a setback for new entrants in the property market.
”The ACDP hopes these measures will be short-term,” said Steve Swart, the ACDP spokesperson on finance.
Meanwhile, the Congress of South African Trade Unions (Cosatu) said it was shocked by Mboweni’s decision.
”This decision will cause direct harm to working people and the poor, above all by further slowing economic growth and employment creation,” Cosatu spokesperson Patrick Craven said.
He said higher interest rates take place when, among others, inflation remained far below the top of the targeted range and growth remained slow.
Unemployment remained far above international norms, Craven said in a statement.
”In these circumstances, Cosatu wholeheartedly condemns the decision to raise interest rates.
”The Reserve Bank is supposed to serve our people. Instead, it has become a harsh master, contributed to continued joblessness and poverty.
”We will be seeking an urgent meeting with the governor to engage with him on this burning issue and will consider how we can respond to this decision through our ongoing jobs and poverty campaign,” he said. — Sapa