MASERU – Local banks have announced an increase on the prime lending rate to 8.25 percent, which has seen a hike in interest rates on nearly every loan including mortgages. The prime lending rate is the interest rate used by banks, usually the interest rate at which banks lend money to customers with a good credit rating. Financial institutions and large lenders base their interest rates on the prime rate, generally establishing their current rates at an amount that is higher than prime to cover their larger risk of default.
If the prime rate rises, the interest rates on individual loans and adjustable-rate credit cards will rise as well. Apart from that, the prime rate affects liquidity in the financial markets. When the rate is low, liquidity increases. This means funds are more readily available because loans are less expensive and easier to qualify for which, in turn, generates a growing economy as businesses expand.
Conversely, when the prime rate is high, liquidity is low and loans are hard to come by, thus slowing the economy down. Speaking a local economist commentator, Majakathata Mokoena, the reason why interest rates are high is due to the current inflation the whole world is facing. “This kind of thing does not discriminate, it affects everyone. However, people with loans such as personal, car loans, house loans and other loans are experiencing high interest due to high inflation,” he said, adding that globally inflation has increased at 10 percent and expected to increase to 11 percent at peak.
“Then, inflation will begin to go down due to the mitigating effect. When this happens, it simply says there is too much money in the system. In the West it is triggered by the fact that Joe Biden (US President) gave households too much money as a Covid-9 relief,” he said, explaining that the problem with that is there was lot of money chasing few products.
He said products were fewer because there were constraints caused by supply chain problems caused by Covid-19 lockdowns which made it difficult for goods to move freely, therefore causing shortage. However, Mokoena said the way to work against inflation is to increase interests, which will automatically reduce demand.
According to the New Times, inflation affects the poor hardest simply because they have less wiggle room. Poor households spend a bigger chunk of their budgets on necessities such as food, housing and especially gas which is a contributor to bouts of high inflation – and less on discretionary expenditure. Factory worker ’Maliteboho Lehakoe said though she doesn’t understand much about inflation she is aware that her salary can only cover rent and food due to high prices of goods.
“My landlord increased my rent from M700 to M800. This while I was used to buying groceries at M500 per month, but now with prices this high I have been forced to top it up with M200,” she said, explaining that she now has to walk to and from work because she is left without any money for transport. According to data released by Statistics South Africa, the consumer price inflation increased to 6.5 percent in May from 5.9 percent. It broke through the Reserve Bank’s 3 to 6 target band, raising the likelihood of a high interest hike in July.