Wednesday, August 17, 2022

Rate cut may stir up stock market interest

The recent bank rate cut by the Central Bank to eight percent, the third in a row this year, may discourage savings in bank deposits and encourage investors to look for other investment instruments such as the stock market and unit trusts.

Commenting on the August 13, 2013 Bank of Botswana (BoB) Monetary Policy Decision (MPS) decision, former central bank deputy governor and independent economist, Dr Keith Jefferis, hailed the move as positive for economic growth stimulation but posited that the rate may dampen bank deposit savings.

“As economic growth has been slowing and inflation abating, the decision is positive for economic growth stimulation. The downside is that it may discourage savings in bank deposits and encourage investors to save elsewhere like in the stock market (shares) and unit trusts,” said Dr Jefferis.

Inflation eased from 6.1 percent in May 2013 to 5.8 percent in June compared to 7.3 percent in June 2012 and was within the bank’s objective range of 3 ÔÇô 6 percent. The decrease in inflation in June 2013 was attributable to both the dissipation of base effects arising from the increase in administered prices in 2012 and a slowdown in the annual rate of price increase across as broad range of goods and services.

Weak domestic demand and the forecast benign external inflationary pressures contribute to positive inflation outlook in the medium term, with the potential for slowdown in inflation according to the central bank.

The central bank, however, warned that the outlook could be negatively affected by any unanticipated large increase in administered prices and government levies, as well as international food and oil prices increasing beyond current forecasts.

The rate cut in Dr Jefferis’ view is “not particularly surprising as inflation has been slowing down in the past two months”. He, however, said it may have been more appropriate for the cut to have been announced after the July inflation figures were out. The July inflation figures were expected to be released last week.

He said the downside of the rate cut was that it was not positive for savers but was not sure of the impending reaction. “It’s a question of how people are sensitive to interest rates,” said Jefferis.

Generally, Batswana, especially ordinary borrowers (household borrowers) are believed to be insensitive to rate change as their interest is mainly focused on obtaining loans to meet their personal needs.

However, for corporate investors who are looking for higher returns, they may be influenced to shift to other investments instruments that will yield better returns.

Botswana Stock Exchange (BSE) Product Development Manager, Thapelo Tsheole, concurred with Dr Jefferis that the rate cut may stir investors’ interest in the stock market, explaining that interest rate cut puts money back into the pockets of people who would then want to invest it elsewhere.

Tsheole said the rate cut means that the rate of return on money market instruments such as bank deposits will dampen which basically means that investors will start looking for high return yielding instruments in the market such as the stock (share market).

“This makes share investments attractive when there is an interest rate. It opens a window for investors to participate more in the stock market,” said Tsheole.

Announcing the MPS decision, the central bank said world output is projected to increase by 3.1 percent in 2013. The growth is unchanged from that of last year. “Growth in economic activity in emerging markets is expected to slow down, although remaining stronger than in developed economies.

Overall, the subdued global output expansion and restrained demand have so far contributed to moderate world inflation. In addition, the low capacity utilization and high unemployment rates in major economies continue to constrain global inflation,” said the bank in its press release.

On the domestic front, the central bank Gross Domestic Product expanded by 3.6 percent in the twelve months to March 2013, down from six percent for the corresponding period the previous year, reflecting an increase of 5.2 percent in non-mining GDP, together with a contraction of 6.1 percent in the mining sector. It is anticipated that non-mining GDP will remain below potential in the medium term and will not be inflationary.

Furthermore, it is expected that the influence of demand on economic activity will be modest, largely reflecting trends in government expenditure and personal incomes.

In arriving at the reduction decision, the central bank concluded that the state of the economy, in which unemployment remains high (at 18 percent), together with below trend economic activity provided scope for monetary stimulus to spur stronger output growth.

Commercial banks are expected to make necessary interest adjustments in accordance with the rate reduction decision.

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