Saturday, July 2, 2022

BoB hikes interest rate

Commercial banks are expected to comply and increase the prime lending rate by not more than 51 basis points after the Central Bank, Bank of Botswana (BoB) Monetary Policy Committee (MPC) increased rate by 51 basis points to 1.65 percent.

MPC decided to increase the Monetary Policy Rate (MoPR) by 51 basis points on Thursday from the prevailing 1.14 percent yield on the 7-day BoB Certificate to 1.65 percent.

BoB Governor Moses Pelaelo told the media that inflation declined from 10.6 percent in February 2022 to 10 percent in March 2022, remaining above the Bank’s medium-term objective range of 3 – 6 percent. He added that the latest decline in inflation mainly reflects the base effects associated with the upward adjustment in domestic fuel prices in the corresponding period in 2021.

He is of the view that the current high level of inflation is mainly driven by supply-side factors which contribute about 7 percentage points to the prevailing inflation (March 2022). Pelaelo said however, the MPC projects that inflation will, in the short term, remain above the objective range but continue to trend downward in 2022 and to revert to within the objective range from the first quarter of 2023. He added that this is mainly on account of the dissipating impact of the upward adjustment in the value added tax (VAT) and administered prices from the inflation calculation.

“There is significant risk that inflation could remain elevated due to factors that include the potential increase in international commodity prices beyond current forecasts; persistence of supply and logistical constraints due to lags in production; the economic and price effects of the ongoing Russia-Ukraine conflict; uncertain COVID-19 profile,” said Pelaelo.

He further stated that the likelihood of further increases in domestic fuel prices in response to persistent high international oil prices could add upward pressure to inflation. He also spoke about risks such as domestic risk factors relating to possible regular annual administered price adjustments, short-term unintended consequences of import restrictions (shortages in supplies leading to price increases); as well as second round effects of the recent increases in administered prices and inflation expectations that could lead to generalized higher price adjustments.

“Real Gross Domestic Product (GDP) grew by 8.6 percent in the twelve months to September 2021, compared to a contraction of 7.3 percent in the corresponding period in 2020,” said Pelaelo.

He also stated the MPC noted the growth-enhancing economic transformation reforms and supportive macroeconomic policies currently being implemented. He said they include accommodative monetary conditions, improvements in water and electricity supply, reforms to further improve the business environment and government interventions against COVID-19, including effective vaccination rollout programme. He said the MPC notes the elevated inflation outlook emanating from the second-round effects and entrenched expectations (for example, through price adjustments by businesses, contractors, property owners and wage negotiators) for higher levels of inflation arising out of the increases in administered prices, upward adjustment of VAT, as well as the prolonged supply chain disruptions arising from the COVID-19 pandemic and the Russia-Ukraine conflict.

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