Fitch Solutions, the industry-leading provider of credit, debt market, and macro intelligence solutions, and primary distributor of credit ratings agency Fitch Ratings, has forecasted that Bank of Botswana (BoB) will cut its benchmark interest rate by end of this year to stimulate economic growth.
On Monday, Fitch Solutions disclosed to the markets that it expects Botswana’s central bank to cut the bank rate from 5 percent to 4.5 percent this year, and maintain the rate until 2020. The basis of the forecast is on the backdrop of slowed economic growth, and muted credit growth that has struggled to rebound from a steady decline between May 2012 and September 2017.
In March 2019, credit growth 6.5 percent compared to 2011 -2018 average of 13.2 percent, a development that has hindered growth of private consumption and investment. Moreover, Fitch Solutions forecasts real domestic growth product (GDP) to slow down to 3.9 percent throughout this year ÔÇô well below the 2010 ÔÇô 2018 average of 4.9 percent. The slowed growth has been attributed to poor dynamics in the mining and construction sectors.
“We believe the relatively muted macroeconomic backdrop will provide impetus for an interest rate cut in the half year,” noted Fitch in its assessment report.
BoB has maintained the bank rate at 5 percent since 2017 where it cut the rate from 5.5 percent to 5 percent. The central bank has not hiked rates since 2008- instead the bank has been cutting rates from the highs of 15.5 percent in 2008 to the lowest current levels of 5 percent.
Dr. Tshokologo Kganetsano, BoB’s head of Research and Financial stability, in a previous response to Sunday Standard said that they remain satisfied with their monetary policy stance, explaining that through their policy tools, they have arrested inflation within the bank’s objective range of 3 ÔÇô 6 percent.
Inflation ÔÇô which measures the rise in prices ÔÇô has also been on a downward trajectory since 2008, finally falling within bank of Botswana’s desired objective range in 2016.
In response to whether the bank rate cuts have bottomed out since the bank has been maintaining the same rate for a year now, he said it has not, hinting that there is room for further cuts. “There is no specific figure where we can say confidently that at this point we are done. The monetary policy is influenced by economic realities. So should circumstances change, the bank will act accordingly,’ Dr. Kganetsano said.
In relation to this, Fitch says subdued inflation in Botswana and loosing monetary policy in developed markets will offer room for a cut, adding that they forecast that inflation will remain around the lower bound of the country’s central bank’s 3 ÔÇô 6 percent target range, though it will accelerate gradually in the coming months to an average of 3.3 percent compared with 3.2 percent last year.
Latest consumer prices data from Statistics Botswana recorded inflation at 2.8 percent in June, slightly below the lower rung of the objective range. Earlier this year BoB during the February 2019 monetary policy committee (MPC) revised the inflation forecast, rising it slightly following new information pertaining to the country’s economy. The central bank said it expects inflation to be slightly higher in the short to medium term, but will remain within the bank’s 3 ÔÇô 6 percent objective range.
This was also echoed by Fitch, which expects inflation to accelerate from 3.3 percent in 2019 to 3.7 percent in 2020 owing to an uptick in global oil prices, and ongoing depreciation of the South African Rand against the value of the Pula. South Africa remains Botswana’s biggest trading partner, and with the weakened Rand, Botswana might buy more stuff in South Africa cheaply, thus stimulating domestic demand, thus rise in prices. As prices increases, central banks usually do not cut bank rates as it might stimulate more demand.
“We nonetheless highlight upside risks to our interest rate forecast. Should economic activity show signs of resilience over the coming quarters, matching the BoB’s expectation for 4.2 percent growth in 2019, this would reduce the need for a cut this year. Similarly, a return of risk-off sentiment to financial markets following escalating US-China trade tensions or growing signs of a global economic downturn could put more pressure on emerging market assets such as the rand and the pula than we currently anticipate. Such a scenario would exacerbate imported price pressures in Botswana and could incentivise the BoB to avoid cutting or potentially raise its benchmark interest rate,” Fitch said in a statement.