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Mercantile Bank upsets the bond rate apple cart
Niche bank may force the big four to follow suit, despite the Reserve Bank ruling out an immediate rate cut, write MARCIA KLEIN and SVEN LUNSCHE
Also on Friday, Reserve Bank Governor Chris Stals effectively ruled out a Bank rate cut before the introduction of the new interest-rate mechanism - the repurchase (repo) rate - on March 9. "It is difficult to find a reason why we should move before March 9," Stals said. From tomorrow, Mercantile clients will be eligible for a bond interest rate on a new home loan of 18%, one percentage point lower than the major banks. A one-percentage point drop reduces the instalment of a 20-year bond by R83.33 on a R100 000 loan. The move comes amid much speculation about the timing of the next interest-rate cut, with economists generally expecting a two-percentage point drop this year. The Reserve Bank last dropped the Bank rate by one percentage point to 16% in October last year. Mercantile's move also pre-empts the introduction of the new repo rate in March. The repo rate will result in fluctuating bank rates and make rates more market than policy-related. Mercantile's move could force the big four, Absa, Standard, First National and Nedcor, to cut their own rates. Mercantile Bank executive director Alan Greenstein says: "Our liability structure is such that we are able to offer this reduction. This is the first time that a bank outside the big four has lead a reduction in interest rates." But he says the move "is certainly not aimed to cock a snook" at the big banks. "We have the ability to drive more business through home loans. This is not being done to force the response of the big banks." However, mortgage lending is a highly competitive area, and banks may be inclined to follow. In 1996, Standard Bank moved independently to cut its lending rate, but all the big banks followed immediately. An economist says unless one bank's lending or deposit book is so fundamentally different to the others, it is difficult not to move in line with the rest. Stals said banks would normally maintain a linkage between their main interest rates, such as bond and prime, and the repo rate. "But the repo rate itself is effectively determined by the market and introduces new flexibility in the market." He said at this rate the indications were that the repo rate would move downwards, but that this would be marginal. Stals expected banks to look at three-month averages of the repo rate in determining their interest-rate moves, rather than the day-to-day rate. First National Bank MD Viv Bartlett said the banks were in "early discussions" with the Reserve Bank for the creation of an index that averaged "our cost of money". Another way banks could take their cue from the repo rate is to set upper and lower boundaries for the rate at which a particular bond, or prime, rate applies. If the repo rate moves outside the range, the banks will adjust their interest rates accordingly. Bartlett said because the repo rate "is far more representative of the real cost of money", banks would have little leeway for offering differing key interest rates. Service would be the main differentiating factor. Stals said an additional advantage of introducing the repo rate was that banks would seek alternative funds, including from each other, before they paid the repo rate. "The inter-bank market will become much more active," said Stals, pointing to the importance of the London inter-bank rate (Libor) in the UK. Mercantile's offer is valid for all new home loans granted in terms of Mercantile's normal credit criteria. Greenstein says Mercantile has taken a view until March 31, but if it goes well, the offer will be extended. The offer is conditional upon customers applying for two products, one of which must be a current account into which the customer's salary is paid. The second qualifying product can be selected from a variety of products. Greenstein says these conditions would apply under any normal home loan, but are being spelt out to prequalify the applicant. ý Stals also indicated that the Reserve Bank's growth estimates had not changed materially following an improved agricultural outlook. "We are still expecting economic growth of between 2% to 2.5% this year." He concurred with his economics department's expectation of an increase in the current account deficit this year from last year, but said it would be matched by capital inflows.
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