Interest Rate Derivatives in the South African Market Based on the Prime Rate

This study focuses on banking book interest rate risk (IRR) management, more specifically short-term IRR management (SIRR). This type of risk is partly induced by the inflation targeting policy of the South African Reserve Bank (SARB). As a result, inflation leads to an uncertain interest rate cycle and a period of uncertain interest rate levels as it relates to lending and borrowing activities in the South African commercial banking sector. This study highlights what causes short-term interest rate risk and how the banks may forecast and manage the SIRR with reference to the inflation targeting policy. The banking industry manages a high volume of fund transactions and portfolios of investments. The banks are intricately involved in the financial markets and are therefore exposed to a large number of risk factors. A sound banking system is an important prerequisite for a country’s future economic development. One key empirical finding of this research is that 50 per cent of the South African banks agree that loans that cannot undergo immediate rate adjustments are exposed to the repo-rate adjustment after the Monetary Policy Committee (MPC) meeting. Banks surveyed see the need for the development of a short-term interest rate risk (SIRR) management process to better control such repo-rate risk. The next key empirical finding is that interest rate risk is still managed via traditional repricing gap and sensitivity analysis which is not ideal for risk management due to inherent weaknesses (such as not quantifying capital risk exposure). This agrees with the Pricewaterhousecoopers Balance Sheet Management benchmark survey

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The Determinants of Interest Rate Spreads in South Africa: A Cointegration Approach

Journal of Economics and Behavioral Studies ◽

10.22610/jebs.v7i2(j).567 ◽

2015 ◽

Vol 7 (2(J)) ◽

pp. 101-108

Author(s):

Ferdinand Niyimbanira ◽

Sanderson Sabie Kuyeli . ◽

Koleka Rangaza .

Keyword(s):

South Africa ◽

Interest Rate ◽

South African ◽

Policy Implications ◽

Future Research ◽

The South ◽

Reserve Requirements ◽

Explanatory Variables ◽

Interest Rate Spreads ◽

The Interest Rate

This study empirically identifies the determinants of interest rate spreads (IRS) in South Africa over the period 1990 to 2012. The study uses the Johansen Cointegration Approach and Vector ErrorCorrection techniques to identify the variables in explaining the interest rate spreads in South Africa. It considers the inflation rate, reserve requirements, Treasury bill, discount rate, money supply (M2) and gross domestic product per capita variables as they explain the movement of interest rate spreads. A significant short-run relationship between IRS and its explanatory variables was observed. These macroeconomic variables are significant in explaining the behavior of the South African IRS in the longrun. This paper has focused on illuminating on how the interest rate spreads are impacted by both exogenous and endogenous variables. If controlled, these variables are most likely to have the largest effects on reducing such spreads. In addition, it suggests that the reduction in the reserve requirements prescribed by the South African Reserve Bank would help to reduce the interest rate spreads. Based on the results of the study, policy implications and suggestion for future research are made.

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The dynamic response of the rand real exchange rate to fundamental shocks

Journal of Economic Studies ◽

10.1108/jes-08-2014-0148 ◽

2016 ◽

Vol 43 (1) ◽

pp. 108-121 ◽

Cited By ~ 1

Author(s):

Mehmet Balcilar ◽

Rangan Gupta ◽

Charl Jooste

Keyword(s):

Exchange Rate ◽

Interest Rate ◽

Real Exchange Rate ◽

South African ◽

Impulse Responses ◽

The South ◽

Content Type ◽

The Exchange Rate ◽

The Relationship ◽

Over Time

Purpose – The authors analyse the relationship between the South African real exchange rate and economic fundamentals – demand, supply and nominal shocks. The paper aims to discuss these issues. Design/methodology/approach – The authors use a time-varying parameter VAR to study the coherence, conditional volatility and impulse responses of the exchange rate over specific periods and policy regimes. The model is identified using sign-restrictions that allow for some neutrality of impulse responses over contemporaneous and long horizons. Findings – The results suggest that the importance of fundamental shocks on the exchange rate is time dependent. Hence there is a loss in information when using standard linear models that average out effects over time. The response of the exchange rate to demand and supply shocks have weakened over the 1994-2010 period. Research limitations/implications – The period following financial crisis has strengthened the relationship between supply and demand shocks to the exchange rate, but has weakened the relationship between interest rate shocks and the exchange rate response. Practical implications – This paper provides deeper insight as to how the exchange rate responds to fundamental shocks. This should help monetary policy understand the consequences of interest rate decisions on the exchange rate and the indirect effect of inflation on the exchange rate. Originality/value – This application is new to the South African literature. The authors propose that the use of interest rates is limited in affecting the value of the rand exchange rate over particular periods. Isolating fundamental shocks to exchange rates over time helps policy makers make clearer and more informed decisions.

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