MBABANE – Eswatini’s efforts to stimulate economic activity through lower interest rates may not translate into cheaper loans.
This is as commercial banks could increase lending margins to protect profitability.
This is according to a new International Monetary Fund (IMF) study.
The report, Monetary Policy Transmission Through Banking: Evidence from Eswatini, finds that maintaining the Central Bank of Eswatini’s (CBE) discount rate below South Africa’s policy rate can be associated with higher domestic lending rates over time, partly offsetting the intended benefits of monetary easing.
Prepared by IMF Economist Yumeng Gu, the study suggests that banks may adjust the margins charged on new loans to compensate for risks arising when domestic and South African interest rates diverge.
This means that lowering the discount rate does not necessarily result in lower borrowing costs for households and businesses, potentially limiting the effectiveness of monetary policy in encouraging borrowing, investment and economic activity.
The IMF attributes this response partly to the way Eswatini’s banking sector is integrated with South Africa’s financial markets, which influences banks’ funding costs and lending decisions.
The study explains that most bank lending in Eswatini operates on a floating-rate basis, with interest rates linked to the Prime Lending Rate (PLR). The PLR is set at 3.5 percentage points above the CBE discount rate, a relationship that has been in place since September 2003.
Changes in the discount rate therefore affect borrowing costs on existing variable-rate loans relatively quickly. However, banks retain discretion over the margins they charge on new loans, allowing them to account for borrower risk, funding costs and market conditions.
When the CBE’s discount rate falls below the South African Reserve Bank’s (SARB) repo rate, banks may face risks associated with the difference between the two countries’ interest rate environments.
According to the IMF, banks may respond by increasing lending margins to protect their interest income and maintain returns relative to alternative investments.
The study finds that a widening negative policy rate differential, where the CBE rate falls further below the SARB rate, is associated with higher lending rates over time. The report cautions that this can weaken the intended stimulus from lower domestic rates.
The IMF also notes that persistent differences between the two countries’ rates can encourage large companies to move funds across the border in search of better returns or obtain financing from alternative sources in South Africa.
South African policy drives local rates
MBABANE – The findings reflect the constraints imposed by Eswatini’s membership of the Common Monetary Area (CMA), under which the Lilangeni is pegged one-to-one to the South African Rand.
The arrangement allows free capital movement and full convertibility between the currencies, closely linking domestic financial conditions to those prevailing in South Africa.
The IMF found that changes in the SARB policy rate are transmitted rapidly and almost completely to average lending rates in Eswatini, with pass-through approaching full adjustment within one month.
By comparison, changes in the CBE discount rate have limited and generally statistically insignificant effects on bank deposit rates.
The report explains that local banks compete for corporate and institutional deposits whose pricing is closely linked to South African market rates.
Large depositors can transfer funds across the border when more attractive returns are available, limiting the CBE’s influence over the rates banks offer.
The study identifies four notable periods of sustained negative policy rate differentials since 2000. The most recent ran from March 2022 to October 2025.
The gap reopened in May 2026 after the SARB raised its policy rate to 7 per cent while the CBE maintained its discount rate at 6.75 per cent, leaving the domestic rate 0.25 percentage points lower at the time examined in the report.
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