Buoyed by positive medium term inflation outlook, Bank of Botswana lowered the cost of borrowing as everyone prepares for the festive season.
The Central Bank, headed by Linah Mohohlo, surprised the market on Friday with 0.5 percent Bank Rate cut from 10 to 9.5 percent.
“The current state of the economy and the assumptions on both the domestic and external economic outlook, as well as the inflation forecast, suggest that maintaining a loosening monetary policy bias is consistent with the achievement of the Bank’s 3 ÔÇô 6 percent inflation objective in the medium term,” the Bank said through its spokesperson, Andrew Sesinyi.
“Accordingly, the Monetary Policy Committee decided to reduce the Bank Rate by half a percent to 9.5 percent,” it added.
The move was the first rate cut after a year as the Bank Rate was last adjusted from 11 to 10 percent in 18 December 2009.
BoB said it believes in the absence of exogenous factors, including VAT, electricity hike and alcohol levy, inflation would be within the Bank’s 3 ÔÇô 6 percent inflation objective range.
Inflation is expected to fall within the objective range in the second quarter of 2011 as the impact of these transient factors dissipates.
Gary Guma, an analyst at Motswedi Securities, described the move as ‘surprising’.
“We expect commercial banks to reduce the prime rate by the same margin to 11 percent from 11.5 percent.
“While the reduction in the bank rate is expected to boost economic growth and increase disposable incomes, it will also reduce commercial banks interest rate margins,” he said.
The Central Bank is concerned that the global economic recovery appears to be losing momentum as the impact of earlier fiscal stimuli diminishes.
However, it was encouraged that the economic performance in the emerging market economies remains generally strong.
“With the fragile global economic recovery still dependent on macroeconomic stimuli, the main focus is now on monetary policy stimulus to raise private sector demand and investment,” the Bank said.
“Thus, in the latest round of policy decisions, some central banks reduced their policy interest rates and several others left interest rates unchanged at very low levels, while additional measures to increase money supply through quantitative easing,” it added.
On the other hand, BoB pointed out that the world economic recovery remains fragile given the diminishing impact of earlier fiscal stimuli and continuing high rates of unemployment that contribute to weak consumer and business confidence.
“Overall, measures to consolidate the fiscal and public debt positions, as well as the need to implement enhanced financial sector supervisory measures, have the
potential to slow down global growth,” he said.
The world economy is projected to grow by 3.7 percent in 2010 and 3 percent in 2011, after a 2.2 percent decline in 2009.
This reflects higher projected growth of 6.9 percent in 2010 and 5.7 percent in 2011 for the emerging market economies against 2.5 percent and 2 percent, respectively in the major economies.
“Given low capacity utilisation, high unemployment rates and well-anchored inflation expectations, it is anticipated that world inflation will be restrained,” it added.