The central bank plans to continue with its accommodative monetary policy, including possible bank rate cuts if inflation continues to be stubbornly low, reflecting weakened domestic demand, while some economic observers say the Bank of Botswana’s monetary tools have not been effective in stimulating demand.
According to the central bank’s latest Monetary Policy Report released on Friday, monetary policy is being implemented in the context of prospects for low inflation in the medium term, associated with subdued domestic demand resulting from the adverse effects of the COVID-19 disease containment measures, which have throttled domestic and external economic activity.
“The restrained increase in personal incomes and expected modest increase in foreign prices also contribute to the projected low inflation. Overall, the current state of the economy and the outlook for both domestic and external economic activity provide scope for maintenance of an accommodative monetary policy to support economic activity,” the bank said in the report.
Last week, Bank of Botswana’s Monetary Policy Committee (MPC) in its August meeting, decided to keep the bank rate at 4.25 percent, after it was slashed by 50 basis points from 4.75 percent four months ago. The MPC holds six pre-scheduled meetings per year, at which the monetary policy stance is determined. The last bank rate cut was the bank’s way of stimulating economic activity amid the coronavirus pandemic. By making loans cheaper, economists believe households and firms will have extra cash to spend, stimulating economic activity.
The central bank has assumed the accommodative monetary policy stance for more than a decade following the 2008 global financial crisis. BoB has been cutting the rate since it reached an all-time high of 15.5 percent in June 2008. The current 4.25 percent reached in April marks a historic record low in the country’s modern banking history. In general, as interest rates are reduced, more people are able to borrow more money. The result is that consumers have more money to spend, causing the economy to grow and inflation to increase.
However, inflation has remained stubbornly low, sparking debate over the effectiveness of the central bank’s accommodative policy in stimulating domestic demand and jumpstarting the economy. The monthly inflation report released by Statistics Botswana shows that the annual inflation rate in July was 0.9 percent, same rate as June. This is a record low rate since 1975. The low inflationary environment in the country, extends as far as 2011, marked by consecutive annual decreases. The average inflation rate was 2.9 percent in 2019, down from 3.2 percent in 2018 and 3.3 percent in 2017. Furthermore, inflation averaged 1.9 percent in the second quarter of 2020, lower than the average of 2.6 percent in the second quarter of 2019, accounted for by the decrease in domestic fuel prices in April and June 2020.
While the lower consumer prices continue to defy the norm of low bank rates, the central bank is confident that inflation is expected to revert to within the 3 – 6 percent objective range in the third quarter of 2021, influenced by the accommodative policy stance and the stimulus to activity derived from government economic recovery and transformation plan (ERTP). The government plans to pump P43 billion in economy through ERTP and the National Development Plan (NDP 11). In addition, inflation might get a push from the likely increase in international commodity prices, the expected upward adjustment in electricity tariffs, as well as base effects associated with decrease in fuel prices in 2020.
