Prime rate returns to above 12% last week in temporary blip

Loan rates to other borrowers, including for small businesses fall 79bps to 14.38% 

The weekly prime rate which was on a steady path downwards in the last few weeks coming below 12.0 percent gained last week going back up above the 12.0 percent level, an event which is attributed by the financial market participants and economist as idiosyncratic as there is no conceivable reason for it to head upward as financial conditions keep easing.

According to the weekly data by the Central Bank, the benchmark weekly prime lending rate advanced 47 basis points last week to settle at 12.25 percent, more than reversing the decline in the rate registered so far this year.
The prime rate fell by 26 basis points steadily in the first three weeks of the year ending at 11.78 percent before last week’s about turn.

Some attributed the change of direction to the holiday shortened week as the average prime rate is worked out using the prime rates the banks report with the Central Bank for the loans they approved in that week.
The average prime rate is the benchmark lending rate for the banks’ most creditworthy clients for short term lending and is the closest market lending rate to respond to the policy rates. The direction of the prime rate signals where the rest of the lending rates in the economy charged for mortgages to small business loans to consumer credit and so on would be heading.

Keeping with what they said in November, the Central Bank last week left their key policy rates unchanged at 9.0 and 10.0 percent levels to both lean against the uptick in inflation in the near term and also to give the market lending rates more time to adjust further downwards.

They believe that the totality of the previous monetary easing and the risk premia attached to government securities coming off lately should bring the rates further down towards the policy rates, relaxing the financial conditions in the economy which will help acceleration in the credit flow from the banks to the real economy.
The prime rate has come a long way from its peak levels of near 30 percent back in December 2022 when the benchmark rate shot up to record highs in response to the monster policy rate hike in April that year to rein in inflation which rose to 70 percent levels.

A year ago, the prime rate stood at 25.28 percent reflecting the beginning of some easing in financial conditions in response to the relative improvement seen in the foreign currency liquidity conditions.
Meanwhile, in a further sign of the eased monetary policy working their way through the economy, the average weighted new lending rate which broadly captures the price of loans to other sectors of the economy in the most recent period eased notably in December 2023, falling 79 basis points from a month ago to 14.38 percent.
This rate was at 26.20 percent a year earlier reflecting how tight the credit conditions were at the time.