The impact of monetary policy on aggregate bank performance in South Africa.

Abstract

This study investigates the impact of monetary policy changes on aggregate bank performance in South Africa using monthly data from January 2019 to May 2025. Employing the Autoregressive Distributed Lag (ARDL) model, the analysis explores both long-run and short-run relationships between the repo rate and key performance indicators, namely: return on equity (ROE), return on assets (ROA), and net interest income to interest-earning assets (NIIIEA). The study incorporates bank-specific variables such as the capital adequacy ratio (CAR) alongside macroeconomic indicators, including the production index (PROD), REPO (repurchase) rate, debt securities issuance (DEBT), and the real effective exchange rate (REER). The findings confirm statistically significant associations between monetary policy and bank performance, with repo rate adjustments exhibiting asymmetrical and time-varying effects. The study tests three hypotheses concerning the link between monetary policy and bank performance, the effects of policy easing and tightening, and the asymmetry in policy pass-through. Results showed both short- and longrun relationships: repo rate adjustments and inflation significantly influence profitability and operational efficiency. Tightening improves interest margins but reduces short-term lending profitability, while inflation supports returns on equity and short-term assets. Strong capital buffers and higher economic output bolster performance, whereas currency appreciation weakens borrower repayment capacity. The findings confirm asymmetric effects, where delayed reductions in loan demand dampen immediate benefits from rate hikes. While tighter monetary policy improves interest margins in the long run, it constrains short-term profitability. The study concludes that strategic alignment with monetary policy is essential for banks to maintain resilience and operational efficiency. Recommendations are provided for the South African Reserve Bank (SARB), commercial banks, and policymakers, and future research directions are proposed to deepen the understanding of monetary transmission mechanisms in the banking sector.