Banks lift rates to rebuild margins as crisis grips
Economists are reluctant to call a bottom for the rand as emerging market turmoil persists, writes ANDREW GILL
Absa joined Standard Bank and Nedcor late on Friday by upping its benchmark lending rate by 1.5 percentage points to 23.75%, with effect from yesterday. The cost of new home loans will rise by the same amount to 21.5%.
Standard Bank raised its prime rate by one percentage point to 23.25% and was followed by an even bigger jump when rival Nedcor upped prime by slightly more, to 24% from 22.25%.
The banks have upped rates three times from 18.25% at the beginning of the crisis.
FNB had not yet followed the other three by Friday night.
Analysts said the move came as a surprise as the Reserve Bank's repurchase (repo) rate had not risen substantially on Friday, although it had moved up from 18.3% at the start of the week.
The repo rate rose by 20 basis points to 20.578% on Friday, and forced SA bond market rates to 18-month highs. The yield on the R150 rose to its highest level in 18 months, touching 16.00% before recovering to 15.90%.
Analysts say the economy is dangerously close to dipping into recession - well off the 3% to 4% growth forecasts earlier this year.
"The outlook is becoming more and more bearish. The bottom line is how long current interest rates prevail and to what extent they could rise even further," said Johan Rossouw, economist at Huysamer Stals.
He said third quarter 1998 growth could be dramatically slower than expected.
The rise in rates followed a continued slide in the value of the rand against a range of currencies.
The rand lost 10% against the dollar in the week, bringing to more than 30% the losses seen since the start of the year.
It settled at R6.36 against the dollar late on Friday and R10.47 against the pound.
Traders said a large slice of the decline in the rand could be attributed to intense selling of bond holdings by foreigners this week. Between Monday and Thursday they sold R2.87-billion in bonds.
Although most analysts agree the rand is now undervalued, they remain reluctant to call a bottom for the currency as long as current emerging market turmoil persists and US hedge funds remain intent on further rand sales.
They say fundamentals do not support current rand levels, especially since the government has taken such a hard line on its Cosatu and Communist Party alliance partners over economic policy.
Even criticism of Reserve Bank governor Chris Stals for his handling of the crisis has abated.
The Bank managed to achieve a relatively steady repo rate through the week compared with wild swings of the previous week.
But traders and analysts say speculators have the rand in their sights and are unlikely to let go for some time. They say the result is likely to be an even higher repo rate and an increase in prime.
Fanie Leach, Absa deputy operating executive, said the latest rise in rates still left the bank some 30 to 40 basis points short of the margins it enjoyed before the crisis.
"But 30 to 40 points is a lot when you are looking at a R130-billion rand book," he said.
He also said it would take some time to recover margins lost in recent weeks as a result of the rand crisis and the initial lag in banks' reacting to the higher repo rate.
Leach could not rule out further increases in bank lending rates if the crisis worsened. Top of page