Sunday, July 3, 2022

Surging inflation clears way for Interest Rates hike

The Bank of Botswana (BoB) on Thursday raised its Monetary Policy Rate (MoPR) for the second time joining other global central banks in tightening monetary policy to fight resurgent inflation.

The central Bank increased the MoPR to 2.15 percent from the 1.65 percent level it has deployed since April 2022. The hike was the second increase by the bank’s Monetary Policy Committee (MPC) since the 2008 economic global recession. 

Announcing the hike, central bank governor Moses Pelaelo said that the MPC decided to hike the MoPR by 50 basis points to anchor the entrenched expectations for higher levels of inflation.

“The MPC notes that the elevated inflation outlook partly emanates from the second round effects and entrenched expectations (for example, through price adjustments by businesses, contractors, property owners and wage negotiators)”, said Pelaelo.

He further explained that in the interest of maintenance of price stability in the medium-term, it is important to undertake monetary policy action to moderate prospects for second round effects and entrenched expectations for high inflation.

Botswana’s headline inflation which reached 11.9 in May 2022 is projected to be higher in the forecast horizon, mainly reflecting the increase in domestic fuel prices last effected in May, the upward revision in forecasts for trading partner countries’ inflation and international commodity prices, as well as a higher rate of depreciation of the Pula against the South African Rand.

With the central bank forecasting that inflation will reach 11.6 and 11.1 percent in the third and fourth quarter of 2022 respectively, local economic analysts believe that there is room for another hike of the MoPR before year end.

Two-fisted tightening

With the recent interest rates hikes linked to the domestic inflation which is running above the bank’s target and now BOB officials say it must be managed to prevent it from becoming permanently embedded. Pelaelo on Thursday told financial journalists in the capital Gaborone that the central bank had to make a move that will tighten monetary policy. The move however appears to be a two-fisted way that has never been attempted with such intensity. The first move and fight appears to be against the elevated inflation and second target being un-desired market response to the bank’s anchor rate. An unresponsive market over the years has forced central bankers to enhance the potency of the country’s monetary policy.

In April 2022the bank started the implementation of an overhaul of the country’s interest regime with the anchor rate, which was known as the ‘Bank Rate’ renamed ‘Monetary Policy Rate’ (MoPR). The move to enhance the transmission of monetary policy follows what analysts have in the past pointed out, that the bank’s monetary policy measures have not always resulted in the expected response by the market. For instance, while lower interest rates generally boost consumers’ appetites for credit, analysts have noted that banks often continue to push their liquidity into the BoBCs, which are risk-free compared to riskier consumer debt. On the other hand the lowering of the bank rate has not resulted in a higher credit uptake required to lift demand in the economy.

In late April 2022, one of the deputy Bank governors – Dr Tshokologo Kganetsano said that the Monetary Policy reforms were as a result of an intensive engagement within the bank sector for over two to three years.

“We have been debating these issues—-we have been consulting extensively including with the IMF. Our research and stability department worked intensively on these reforms before we went out to announce”.

By late May 2022, a team of the International Monetary Fund that visited Botswana indicated that the country’s monetary policy tightening will be required to reduce inflation pressures. The team however noted that Botswana’s financial sector appears sound, “but the impact of higher rates, declining liquidity and the recent monetary policy reform will have to be monitored”. With Botswana’s economic recovery expected to continue into 2022 amid higher prices and demand for diamonds, prospects for good harvest following good rainfall in some parts of the country, the central banker’s main aim is to better control inflation with the April reforms.

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