For decades, prime has been the number most people look at when trying to understand interest rates on their loans.
But the Reserve Bank says the prime rate is now playing the wrong role and is no longer the true base rate for the financial system.
According to the Bank, prime has gradually become nothing more than a fixed amount above the official policy interest rate.
Since 2001, prime has been set exactly three-and-a-half percentage points above the policy rate, no matter what. This means it no longer carries its own meaning or purpose. It is simply a formula, and not a real pricing tool.
Yet many South Africans still think prime is the rate banks use to decide how much interest to charge. Others even believe the fixed gap between the policy rate and prime allows banks to earn unfair profits.
The Reserve Bank says both of these ideas are wrong. Banks price loans using their own funding costs, their appetite for risk, and each customer’s credit profile, not the prime rate.
Because of this confusion, the Reserve Bank now prefers a future where the prime rate is no longer used at all. Instead, loan contracts would refer directly to the policy rate, which is the real rate the Bank uses to guide the economy.
The Bank believes this would make interest rates easier for the public to understand. When the policy rate moves up or down, the change in loan costs would be clearer and more direct.
Banks would still charge the same interest levels as before, but they would show them as a margin above the policy rate instead of above prime.
Even though the idea sounds simple, the transition will be complicated. Millions of contracts, home loans, business loans, vehicle finance, currently refer to prime. The change will need to be handled slowly and carefully.
New contracts will need strong fallback language that explains how rates work once prime is no longer used. Older contracts will need legal protections so they can shift to the new system safely.
The Reserve Bank says it will use the country’s recent experience with replacing the old Johannesburg Interbank Average Rate, or Jibar, as a guide. Jibar stops being used at the end of 2026, and the Bank wants to finish that transition before starting the new one, to avoid confusion or overlapping reforms.
The bigger story is that South Africa is trying to modernise its entire interest-rate framework. Many countries have already moved away from older benchmarks that no longer make sense.
By moving beyond the prime rate, South Africa is trying to make its lending system clearer, more transparent, and more in line with global standards.
If the change goes ahead, South Africans will no longer have to guess why their loan rates move. The link between the Reserve Bank’s decisions and the cost of borrowing will finally be visible and easy to follow.
