BoB eyes further rate cuts

Mbongeni Mguni | Wednesday March 5, 2014 10:03

 

Last year, the central bank lowered the bank rate four times by a collective two percentage points, as falling inflation allowed it to pursue an accommodative monetary policy stance.

Bank lending interest rates, which are linked to the bank rate, declined by two percentage points during 2013, with listed entities reporting an upswing in household - and to a lesser extent - business borrowings as a result. Unveiling the 2014 Monetary Policy Statement on Friday, BoB governor, Linah Mohohlo hinted at the possibility of further reductions to the key bank rate this year, depending on the direction inflation takes.

“Inflation is projected to remain within the medium-term objective of three to six percent,” she said.

“This means there will be further scope for monetary policy to support economic activity through the current accommodative policy stance, while maintaining price stability. “The Bank will respond appropriately to any sustained deviation of the inflation forecast from the objective range and to any emerging threat to financial stability where the causal factors can be influenced by monetary policy.”

Threats to the inflation forecast in 2014 include increases in administered prices and government levies, as well as international food and oil prices rising beyond current forecasts. In addition, the BoB is keenly watching the ongoing public service wage negotiations and has said any increase above six percent will be inflationary. As in 2013, the central bank is hoping its accommodative stance will boost credit uptake and result in greater aggregate demand to support economic activity.

Last year, however, the two percent bank rate reduction appears to have mainly fuelled consumptive household borrowing, while businesses were largely credit averse.

According to the BoB’s latest data, credit growth in personal loans to households grew from 17.7% in January to 22.6% in November last year, while that for resident businesses including parastatals dropped from 25.1 to four percent over the same period. At the Monetary Policy Statement launch, BoB executives explained that the muted response by businesses to lower interest rates was expected as their planning horizons prevented knee-jerk reactions. “We did not expect that businesses would immediately begin borrowing once the rates were lower,” said the BoB’s director of Monetary and Financial Stability, Kealeboga Masalila.

“Businesses would first look at their planning and needs before borrowing. “That is why our monetary policy is conducted on a medium-term basis.” A Deloitte survey of local chief financial officers conducted last year found indications that businesses were ‘saving for a rainy day’ with 61% focusing on improving operational efficiency and only three percent interested in new debt or equity. Local economists have also said the four bank rate reductions last year had a muted impact in promoting growth.  “I could imagine that in an economy such as Botswana’s, where the private sector is dwarfed by the public sector, the transmission mechanisms of monetary policy are very weak,”

Econsult economist, Thabelo Nemaorani told Mmegi Business recently. “Notwithstanding, 2013 was characterised by falling inflation and so the central bank had to adjust the bank rate so as to keep real interests rates fairly constant.” The BoB’s own business expectation surveys have been reporting ‘muted confidence’ by businesses in prevailing and forecast operating conditions.  The last survey, covering the second half of last year, found that businesses were concerned about sluggish domestic demand and the uncertainty surrounding the availability and cost of key inputs such as electricity and water.