Wednesday, May 22, 2024

BoB slashes interest rates to stimulate economy

Economic commentators praised the central bank’s Monetary Policy Committee’s (MPC)’s decision to slash bank rate by 150 basis points Tuesday in a move aimed at jerking up the jaded economy.

The move brought down the bank rateÔÇöthe rate at which the central bank lends to commercial banks ÔÇô to 11.5 percent, meaning that the commercial banks will follow by reducing the prime lending rate.

“This is a welcome move because the cost of borrowing will be a lot cheaper,” Chief Executive Officer of Stockbrokers Botswana, Geoffrey Bakwena, said Wednesday.

In its decision to lower interest rates, the Bank of Botswana said that “although inflation continues to be above the Bank’s objective range of 3- 6 percent, it is expected to maintain a downward trend over the medium term”.

“However, the current subdued global economic activity and associated low inflationary environment, with deflation in some major economies, as well as the weak domestic economic performance should contribute to lower inflationary pressures,” The Monetary Policy Committee said in a statement.
“I think the Bank of Botswana is approaching this issue in more or less the same way like other central banks by reducing interest rates. The idea is to try to minimize the impact of recession on the whole economy, thereby stimulating consumption,” head of Capital Asset Management, Leutlwetse Tumelo, said.

BotswanaÔÇöa country that is largely dependent on the mineral sector, especially diamonds, has been badly affected to feel the impact of the global economic crisis forcing some of its mines to suspend operations for the whole year, while some are partially running. The diamond industry contributes about 33 percent of the GDP and over 50 percent of government revenue.

Bakwena expressed concern over the prices of crude oil in the international markets, which have spiked to around US $70 per barrel, saying that it is likely to scuttle the gesture made by the Bank of Botswana by trying to make borrowing affordable to Batswana.

“Our biggest problem is the impact of imported inflation and we would not like to see a situation where there is a reduction today to be followed by another increase later,” he added.

The reduction in interest rates is likely to stimulate both household and corporate lending as they try to take advantage of the lower costs of borrowing. The move is likely to lead to the release of cash that is currently locked up in Bank of Botswana certificates (BoBcs) for borrowing needs.

Bobcs are valued at P 18 billion, which is partly used to mop up access liquidity in the market.
“The Bank remains committed to responding appropriately to all economic and financial developments to achieve medium-term price stability, which contributes to long run sustainable economic growth,” the central bank said.

However, Standard Chartered Bank’s head of research for Africa, Razia Khan, was doubtful whether the rate cut would work at household levels since Batswana are not interest rate sensitive.

“The credit culture and the propensity of consumers to access loans from informal micro-lenders at elevated rates when more conventional sources of commercial bank credit are restricted suggest that demand for credit is relatively inelastic with respect to interest rates,” she said.

However, she pointed out that corporate borrowing, which accounts for smaller share of the total credit should benefit from a relaxed monetary environment.

Khan was further bullish that she expects the central bank to ease interest rates down to about 9.5 percent by first quarter of 2010 in an attempt to further stimulate the economy, but added that the opportunities for doing that appear to be limited, given the fact that the South African Reserve Bank has moved far ahead.

“A more compelling argument is that, with higher deficit financing requirement and plans for further long term bond issuance from September, there is a perceived need to front-load the easing. With the inflation outlook relatively benign, there is little reason to hold back,” she added.

This is the third rate cut since the beginning of the year. The first rate cut of 100 basis points was on February 27, 2009 bringing it down from 15 percent to 14 percent. It was followed by another 100 basis point cut on April 21, 2009 bringing it down to 13 percent.


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