Gill Marcus - Governor of the South African Reserve Bank.

The prime interest rates of banks would be lower if the SA Reserve Bank targeted not just inflation but also employment, trade union Uasa said on Thursday.

“... research commissioned by the trade union Uasa shows the current prime interest rate of banks would be 1.4 percent lower at 7.6 percent instead of the current nine percent had South Africa been targeting both unemployment and inflation as opposed to inflation only,” said spokesman Andre Venter.

His comments came after the bank's decision on Thursday to leave the repo rate unchanged at 5.5 percent. The prime interest rate would stay at nine percent.

The prime interest rate should be equal to the repo rate plus 2.1 percent instead of the repo rate plus 3.5 percent, Venter said.

“Alternatively, should the margin of 3.5 percent between the repo rate and the prime rate be maintained, the repo rate should drop to 4.1 percent from the current 5.5 percent.”

The research by Professor Carel van Aardt and Johann van Tonder from the Bureau of Market Research at the University of SA was based on the Rudebusch Equation which targets unemployment and consumer price inflation to determine the optimal prime interest rate.

The SA Reserve Bank only targets inflation.

The bank's decision was, however, welcomed by Absa Retail Bank chief executive Gavin Opperman, as it would bring relief to indebted consumers.

He, however, warned consumers against taking on more debt.

“Consumers should concentrate on using any excess income to consolidate existing debt and start saving.”

Business Unity SA approved of the decision to keep rates unchanged.

“...Busa believes that present economic circumstances require the continuance of an accommodative monetary policy, Busa agrees that interest rates should be left unchanged at this stage,” the organisation said in a statement.

Weaker than expected retail sales in May showed consumer demand could be losing momentum, while the latest weaker production figures suggested a hesitant economic recovery.

“Taken together with uncertainties around the global economic outlook, Busa concurs with the Reserve Bank that, despite rising cost inflation, a 'wait-and-see' policy is appropriate until there is stronger evidence of more generalised inflation,” Busa said. - Sapa