The reduction of the bank rate by the Central Bank wasn’t a surprise but it appears to reveal a tigerish character which the bank is not typically known for, especially with a background one may regard unadventurous.
On Tuesday last week Bank of Botswana Governor, Moses Pelaelo, announced the decision of the Monetary Policy Committee (MPC) to reduce the Bank Rate by 50 basis points (bps) to 5 percent from the prior 5.5 percent.
The underperformance of the economy is the primary reason that the Central Bank has been tinkering with the bank rate, all in an attempt to breathe life into it by inspiring productive activities. BoB’s impetus for rate cuts is that at lower interests rates businesses will be driven to pursue gainful economic activities spurred by the lower cost of borrowing. To make the economy come alive again is one task BoB appears to be growing its bullish skin from. The recent reeling in of rate cuts began in 2015. The first cut of 2015 happened in February from 7.5 percent to 6.5 percent. The next was later in August landing the rate at 6 percent. It wasn’t until a year later that BoB took the rate further down by 50 bps to 5.5 percent. More than another year later (October 2017) a new bank rate is in place at 5 percent.
The disclosure was not out of the blue, in fact if the Africa Monitor, a newsletter which provides comprehensive country-by-country macroeconomic analysis, risk appraisals, latest market data and forecasts for African countries, had made a bet on its prediction of the rate cut it would have on Tuesday struck a handsome amount of gold. It was not the only one that had anticipated that before the year comes to a close BoB would have done another cut, but its analysis stands out because of its sharp accuracy.
“We forecast a further 50 basis points (bps) of cuts by the Bank of Botswana (BoB) before year-end 2017, leaving rates at 5.00% before the persistence of low oil prices in 2018 facilitates a further 100bps in cuts.” This was the submission by the Africa Monitor earlier in July. Given the Monitor’s exactness of the newly introduced rate cut, the projection of an additional deeper cut by a 100 basis points to 4 percent in 2018 should be expected. This means that BoB will continue on its path of defying its conservatism. The Africa Monitor’s expectation is that BoB will hold on to its loose monetary policy through to 2019. This outlook is informed by its prospect that inflation will remain on the lower end of BoB’s 3-6 percent target band. “With inflation erring towards the lower end of target, the central bank will look to stimulate the underperforming economy by cutting interest rates in a bid to boost credit growth that has struggled to break out of a steady decline since peaking in 2012,” it explained. Inflation reached a record low of 2.6 percent in August 2016, which also fell below BoB’s target band. The extrapolation of inflation by Africa Monitor of it treading closer to the bottom of the target band lends credence to the view that times are changing, as clearly demonstrated by the run of the mill economic performance, and so is BoB’s responses to it.
10 months before the Africa Monitor’s forecast Stanbic Bank had seen things differently. It had reckoned in its 2016 September report entitled African markets revealed that the Central Bank will not introduce any further rate cut. “The Monetary Policy Committee of the Bank of Botswana engineered a surprise 50 bps rate cut that took its policy rate down to a low 5.5% in Aug. This was largely on the back of still decelerating headline inflation which has remained below its 3-6% objective for most of the year. Looking forward, we believe that this is the last rate cut in the cycle, for a number of reasons,” it had surmised. But today BoB has shown grit in its effort to re-ignite the economy and if Africa Monitor is right about its prediction of the next cut, it will prove the Central Bank’s ‘newly’ found radical character.