The Bank of Botswana has reduced the cost of borrowing in order to stimulate stronger output growth.
The move is also a response to the current state of the economy, in which unemployment remains high alongside below-trend economic activity.
BoB earlier this week cut its Bank Rate by 50 basis points to 7.5 percent ÔÇô a decision that was widely expected in the market.
The cut marked the fourth half point reduction in 2013. The Bank last slashed the rate in August 2013 in a coordinated move to sustain the brittle economy.
In a brief statement explaining the Tuesday action, the Monetary Policy Committee (MPC) said, “Assumptions on both the domestic and external economic outlook, as well as the inflation forecast, suggest that reducing the Bank Rate is consistent with maintaining inflation within the Bank’s 3 ÔÇô 6 percent objective range in the medium term.”
MPC concluded that the medium-term outlook for inflation is positive, with inflation forecast to remain within the 3 ÔÇô 6 percent objective range.
GDP growth in the past 12 months from 2012 to June 2013 is estimated at 4.6 percent, as a result of a 5.5 percent increase in non-mining output and a 0.7 percent contraction in mining activity.
The influence of demand on economic activity is expected to be modest, largely reflecting trends in government expenditure and personal incomes.
Analysts have hailed the Bank’s cautious decision saying it was in line with expectation, considering the downward trend of inflation. Additionally they believe the MPC will not stop at half percent point, some are forecasting another bank rate cut. However they were not quick to quantify the recent slash’s contribution to economic growth.
“This has reduced the loans installment and payback period and it is a positive change in terms of mortgage affordability,” he said. MPC has called upon banks to make the necessary interest rate adjustments to reflect this policy decision.
“Revising the bank rate downwards is a good decision in line with expectations, given the decline in inflation. However, the bank rate cut is still to be evaluated to quantify its contribution to economic growth which has been slow,” said Garry Juma an analyst with Motswedi Securities.
Juma said this move is expected to propel economic growth through encouraging spending at the same time reducing indebtedness in the country.
Black Thread Capital analyst Dikarabo Tladi hopes the Bank Rate cut may increase the appetite to borrow amongst business.
Meanwhile the economic performance in emerging markets is expected to improve and remain stronger than in developed countries. Subdued expansion in global economic activity and sluggish demand, including low capacity utilisation and high unemployment rates in major economies, have so far restrained world inflation.
