Thursday, May 23, 2024

BoB slashes bank rate, continues to monitor liquidity

Bank of Botswana (BoB) slashed the bank rate this week in line with expectations as oil prices have collapsed in the recent past, dragging national inflation downwards. The reserve bank, headed by Linah Mohohlo, said commercial banks are expected to make the necessary interest rate adjustments to reflect this softening monetary policy decision. The bank rate, which is the benchmark rate, was reduced by 1 percentage point from 7.5 percent to 6.5 percent. The rate has been set at 7.5 percent since December 2013 due to a benign inflationary environment.

“The current state of the economy and both the domestic and external economic outlook, as well as the inflation forecast, provide scope for easing monetary policy to support economic activity without undermining price stability,” the bank said.

“Monetary policy is also aligned with the need to safeguard financial stability. In this regard, credit growth is assessed to be at a sustainable level, thus posing no threat to financial stability. Meanwhile, commercial banks’ liquidity condition continues to be monitored to allow for sound banking operations in support of economic activity.”

Banks have bemoaned lack of liquidity in the market, saying cheap money could stimulate borrowing. First National Bank of Botswana (FNBB) admitted the problem in its interim results revealing that despite the low interest rate environment, total credit extension by commercial banks slowed down year – on – year from 20 percent to 15 percent.

“In September 2014, household arrears as a percentage of advances were 4.24percent, whilst business and non – financial institutions were 5.86percent of advances. Much of household debt is still held in unsecured loans at 63.8percent compared to 36.2percent in secured loans.”

The BoB Governor recently warned banks on the disparities between lending and deposit interest rates, saying they are very large when compared with those of peer countries. She said such a glaring spread suggests that either productivity gains have not been maximised or the benefit is not fairly shared with customers.

“The wide spreads have also slowed the pace of financial inclusion as the attractiveness of borrowing and lending products is diminished,” said Mohohlo.

It is expected that low interest rate environment will spike companies to borrow and expand their businesses and boost economic growth. For 2015, GDP is projected to grow at a slower rate of 4.9 percent. Statistics Botswana said recently that national inflation fell by 0.2 of a percentage point on the December 2014 rate of 3.8 percent to 3.6 percent in January, adding that the change came as a result of movement in commodity prices.

The inflation outlook is subject to downside risks associated with weak global activity and a possible further decline in commodity prices. This could be adversely affected by any unanticipated larger increase than the current forecast for administered prices, government levies and international food and oil prices.


Read this week's paper