The Monetary Policy Transmission Through Banking: Evidence from eSwatini, examines how policy rates affect commercial bank lending and deposit rates under eSwatini’s fixed exchange-rate arrangement.
As a member of the Common Monetary Area, eSwatini maintains a one-to-one peg between the lilangeni and SA rand while allowing capital to move freely between participating countries.
The IMF found that changes in the SA Reserve Bank (SARB) repo rate were transmitted rapidly and almost completely to average lending rates in eSwatini.
A one-percentage-point increase in the SARB rate produced nearly complete pass-through to lending rates within one month.
Deposit rates adjusted more slowly, reaching about 73% pass-through after five months. Changes in the Central Bank of Eswatini (CBE) discount rate had limited effects on deposit rates.
The study found that keeping eSwatini’s policy rate below the SARB rate could have an unintended effect by encouraging banks to increase lending margins.
A more accommodative domestic policy stance was associated with higher lending rates over a one-year period, partly offsetting the intended reduction in borrowing costs.
Banks may increase margins to protect earnings, manage risks arising from differences between the two countries’ policy rates and maintain returns relative to lower-risk investments. “Maintaining the discount rate below the SARB policy rate is unlikely to provide a strong stimulus for credit growth,” the IMF said.
The CBE kept the discount rate at 6.75% after the SARB raised the repo rate to 7% in May 2026, creating a 0.25-percentage-point difference.
The IMF recommended closer alignment between the CBE discount rate and SARB repo rate to improve monetary-policy effectiveness and reduce uncertainty in bank pricing.
Domestic economic objectives should instead be supported through fiscal policy, structural reforms and measures addressing financial-sector risks.
The study used monthly data from eSwatini’s four major banks covering January 2018 to December 2025.
The IMF called for more detailed loan-level data to distinguish pricing on new credit from automatic adjustments to existing variable-rate loans.
–IMF/ChannelAfrica–
