Saturday, October 24, 2020

BoB rate cut the last in the cycle – Report

A September 2016 report entitled African markets revealed compiled by Stanbic Bank mavens, posits that going forward Bank of Botswana (BoB) will not introduce another rate cut.  

“The Monetary Policy Committee of the Bank of Botswana engineered a surprise 50 bps rate cut that took its policy rate down to a low 5.5% in Aug. This was largely on the back of still decelerating headline inflation which has remained below its 3-6% objective for most of the year. Looking forward, we believe that this is the last rate cut in the cycle, for a number of reasons,” reads the report.

The report shares four reasons in support of its view. The first reason ties to their observation that inflation has now reached its lowest at 2.6 percent year on year (y/y) in the month of August to which they expect that it will rise modestly towards 3 percent y/y by the end of the year. Over the course of 2017, it anticipates that domestic inflation will increase to the midpoint of the target range of 3 to 6 percent by midyear. 

The second reason relates to the historical correlation, cited at 90 percent, that existed between South Africa and Botswana food inflation observed between 2008 and 2012 in which they explain that it resumed in mid 2014 after it had appeared to have broken off in 2013. “The recent acceleration in SA food inflation thus leads us to believe that Botswana food prices may also be headed higher in the coming months ÔÇô especially if one also considers that food inflation is rising in most countries in the region, thanks to ongoing drought conditions,” opines the report.    

Petrol prices, as mentioned in the report, provide a valid reason for the bottomed rate cut. According to the report transport inflation has been negative since December 2014, noting that it fell to a low of negative seven (-7) y/y in November 2015 but however has since risen to negative 2.9 percent in recent months. What this translates to, is that unless petrol prices decline meaningfully going forward one can expect technical base effects to push transport inflation back into positive territory in the period ahead.  

“Finally, we note that the pula has depreciated by some 7% against the ZAR this year, and this suggests to us that imported inflation may be on the rise in the coming quarters,” submits the Stanbic experts.  

The rate cut effected by BoB was to stimulate growth in the economy, in the sense of making it cheaper for investors and local businesses to borrow as to plough the funds in expansionary projects. The forecasts provided by the African markets revealed report regarding growth however do not paint a positive outlook. The report describes Botswana’s current economic standing to have weak growth.  

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