Banks still to pass on benefits of July repo rate cut
CAPE TOWN – South African commercial banks have still to pass on the benefits of the 25 basis points cut in the repo rate made by the South African Reserve Bank (Sarb) in July.
Although most banks say they cut the rates that they charge their customers very soon after the Sarb cuts the repo rate, the reality is that it can take some time to adjust all the rates that are linked to the repo rate.
This is reflected in the average overdraft rate reported to the Sarb by the commercial banks. This edged down by only 10 basis points in July to 10.53 percent from June after the South African Reserve Bank cut the repo rate by 25 basis points to 6.5 percent. Banks’ margins are however under pressure as the 12-month fixed deposit rate only fell by 5 basis points to 7.36% as banks vie for customer deposits.
The Sarb noted in its September Quarterly Bulletin that the growth in the deposit holdings of the household sector, which had slowed in recent years, also edged higher in the first half of 2019, reflecting the commercial banks’ continuous efforts to attract and retain deposits.
Last year when the Sarb cut by 25 basis points in March, there was a delayed reaction to the cut and the full 25 basis points cut was never fully passed on. In March the overdraft rate only dipped by 5 basis points from February. There was a further 13 basis points cut in April, so this year we could see a similar cut in August, but as in 2018, we are unlikely to see the full benefit of the cut passed on.
In 2017, the margin between the average overdraft rate and the repo rate was 33.6 basis points, but this widened to 36 basis points in 2018 and in the first seven months it increased further to 39 basis points. Although a basis point is only a hundredth of one percent (0.01 percent), when we are dealing with trillions of rand, that tiny percent represents a significant amount of money. In July, banks lent out just under R3.5 trillion, so one basis point was the equivalent of some R350 million.
The lack of flow through of the Sarb’s repo rate cut is one of the reasons why the ratio of household debt to income rose to 72.7 percent in the second quarter 2019 from 71.6 percent in the second quarter 2018.