BoB cuts rates to stimulate growth

In a move warmly welcomed  by commentators, the Bank of Botswana slashed interest rates by 1 percent on Wednesday. After a closed-door meeting on Wednesday, the Monetary Policy Committee (MPC) announced it had reduced the interest rate to 6.5 percent. Botswana’s central bank went further to say the current state of the economy allows for the easing of the monetary policy to support economic activity.

“This was highly expected,” reacted Tlotlo Ramalepa, an analyst at Motswedi Securities. The last time BoB adjusted the interest rate was in December 2013 when the lending rate was reduced by 0,5 percent. Ramalepa told Botswana Guardian on Wednesday afternoon that with inflation on a free-fall, a room was created for BoB to adjust rates downwards. Inflation is currently sitting at 3,6 percent after declining by 0,2 percent in January 2015. The MPC said the current state of the economy and both the domestic and the external economic outlook, as well as the inflation forecast provide scope for a rate cut that could stimulate Botswana’s mineral-led economy.

However, the rate cut will not undermine price stability, the central bank said because it was caught flak in the past for using inflation targeting as a monetary policy instrument.
Karabo Tladi, an analyst working for private wealth management company, Black Thread Capital, agrees with Ramalepa. “We are not surprised (by the rate cut)” he said. “Inflation is currently under control and is in the lower bracket of the central bank’s objective (of 3-6 percent).”  Inflation is predicted to remain low as all “functions of demand in the economy” are low at the moment, said Tladi. Explaining further, the analyst said consumer spending and government spending are low.

The minister of Finance and Development Planning, Kenneth Matambo, recently outlined a tight budget characterised by less government spending amid a widening budget surplus.
Meanwhile, international oil prices remain stable, which is a positive development for the local economy.  International crude oil prices fell on Wednesday to close markets trading at $60 per barrel. Analysts believe lower rates will have ripple effects on the economy. “This means someone will be able to get loans at a reasonable rate,” said Tladi.
“Lower rates will mean consumers will also have increased disposable income.”

The latest rate adjustment comes at a time when civil servants have not had any above-inflation salary adjustment in years in an economy in which government is the biggest single employer. 
Currently, government and trade unions are locked in talks for a salary adjustment. It is reported that unions have put forward a 15 percent salary adjustment proposal while government is steadfast on a 4 percent adjustment. The private sector, which should lead economic growth, will also benefit from the rate slash because companies will be in a better position to borrow at lower rates for expansion purposes, analysts have noted.

With more disposable income for individuals and affordable lending rates for corporates, the economy is bound to expand, Ramalepa has observed. BoB also said this week that monetary policy is also aligned to safeguard financial stability. “In this regard, credit growth is assessed as to be at a sustainable level,” said the central bank. Commercial banks have been advised to make the necessary adjustment to reflect the latest adjustment.