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Are interest rate hikes on the horizon?

BRIAN BENZA MBONGENI MGUNI
Jefferis
The seemingly stronger than expected recovery in economic growth has prompted divergent economist views on the direction monetary policy is likely to take this year, with the possibility raised of a return to a contractionary stance last seen before the global recession.

Should the Bank of Botswana (BoB) return to the contractionary stance, consumers should be prepared to pay more for their loans and other credit products with financial institutions.

While no analysts are expecting major adjustments to the bank rate at today’s second meeting of the year for the members of the BoB’s Monetary Policy Committee (MPC), several developments are signalling a possible tightening of monetary policy in the near future.

Prior to the global recession, the BoB exercised tight monetary policy, raising interest rates several times in the years preceding and leading the bank rate to a record high of 15.5% in January 2009, as it battled runaway inflation and a looming credit bubble.

From that high, the effects of the global recession domestically drove economic growth down, leading the bank to adopt first a neutral policy stance in 2009, and then and an accommodative stance since 2012, in an effort to support growth, in an atmosphere where inflation was no longer a factor.

“The prospects for a low, predictable and sustainable inflation in the medium term will give rise to the conditions that would permit a counter-cyclical accommodative monetary policy, which would cushion the contractionary impact of restrained fiscal policy on economic activity,” Mohohlo said at the 2012 Monetary Policy Statement launch in ushering in the new stance.

As a result of the shift from the tight stance, the bank rate, the rate at which all interest rates are pegged, has been cut 14 times since early 2009, with last increase having been in mid-2008.

Now, however, some experts believe the recently released 4.3% jump in real gross domestic product for 2016 has weakened the case for further interest rate cuts (policy easing), while others expect that any further volatility in the South African rand leading to higher inflation there, coupled with pressures on oil and food prices globally, could see northward movements in domestic inflation in 2017.

Those favouring the upholding of the accommodative stance argue that inflationary pressures are benign in the medium term and coupled with widespread sentiment that the economy is not out of the woods yet, the BoB is likely to continue supporting growth.

Renowned economist and Econsult managing director, Keith Jefferis believes the central bank is unlikely to make a policy response based only on the 2016 growth figures which he says appear to be detached from the economic situation on the ground.

“The growth figures are a bit of a puzzle and appear to be driven more by the recovery in the diamond market than in the domestic economy, and they are at odds

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with widespread sentiment. So I think the central bank will wait to see what is happening over a longer period with regard to growth before any monetary policy response,” he says.

The last interest rate cut was last August when the bank rate was reduced to 5.5%. “Inflation will rise to around four percent this year. It is likely that the next move in interest rates will be upwards, but this may not happen until late in the year or even into 2018,” Jefferis adds.

Naledi Madala, an Economics desk officer at Barclays Bank Botswana, believes there has been a weakening of the case for monetary policy easing.

“The sharp depreciation of the rand against major currencies will result in high inflation in South Africa and in turn, imported inflation into Botswana,” she says.

“Since we just saw that growth numbers for 2016 were actually much stronger than anticipated at 4.3% versus -1.7% in 2015, we believe the MPC is now relieved and they would rather want to focus on containing any inflationary threats than trying to support economic growth as they have been doing in recent years.

“The bias for policy has therefore shifted towards tightening but it is unlikely to happen anytime soon, though we do believe tightening is possible by 2017 on indications that inflation will edge higher.”

Madala explains that should the monetary policy stance shift towards tightening, consumers would see higher repayments for their debts, particularly those with variable debt.  “In most banks, credit cards rates, personal loans, vehicles and home loans will be affected as they are based on the level of the prime rate,” she says.

“On the other hand consumers with savings accounts will see higher returns, but Botswana does not have such a high savings rate.” FNBB market strategist, Moatlhodi Sebabole swam against the tide, saying tightening was unlikely in the short to medium term.

“As FNBB we do not hold a view of monetary tightening in the next 12 - 15 months. We anticipate a likelihood of a 25bp cut which could be pushed further out to 2018. On April 28, we anticipate that the bank rate will be left unchanged at 5.5%,” says Sebabole.

However, Sebabole concurs with Jefferis that the surprisingly strong 2016 economic growth figures may be not be a true reflection of the economic trends on the ground.

“The growth seems to be more structural. It’s not driven by a rise in neither households nor government spending, but rather from stronger diamond exports  which do not have that multiplier effect on domestic economy or employment,” he argues.



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