BoB keeps interest rates steady
Brian Benza | Thursday April 24, 2014 11:02
At a Monetary Policy Committee (MPC) meeting on Tuesday, it was concluded that the medium term outlook was positive, with inflation forecast to remain within the 3 – 6 percent objective. The central bank uses interest rates to influence economic activity through money supply control.
The MPC said the current state of the economy, domestic and external economic outlook and the inflation forecast, suggests that the current monetary policy stance is consistent with maintaining inflation within the bank’s 3 – 6 percent objective in the medium term. Hence, the decision to maintain the bank rate at 7.5 percent.
The MPC said it is expected that non-mining GDP will remain below potential in the medium term and this will result in low inflationary pressures. “The influence of demand on economic activity is projected to be modest, largely reflecting trends in government expenditure and personal incomes,” said the MPC.
In Botswana, the economy is estimated to have expanded by 5.9 percent in 2013 thus reflecting 10.6 percent growth in mining output and 5.2 percent in the non-mining sector. Mirroring international trends, Botswana’s economic activity as measured by GDP is flagging. Experts forecast that non-mining GDP will remain below potential in the medium term and will not be inflationary. Furthermore, it is expected that the influence of demand on economic activity will be modest, largely reflecting trends in government expenditure and personal incomes.
Inflation decreased from 4.6 percent in February to 4.4 percent in March 2014 and was within the bank’s objective range of 3 – 6 percent. “Moderate domestic demand and the projected benign external price developments contribute to the positive inflation outlook in the medium term. However, this outlook could be adversely affected by any unanticipated large increase in administered prices and government levies, as well as international food and oil prices beyond the current forecast,” said the MPC.
At the launch of the 2014 monetary policy statement in March, BoB governor, Linah Mohohlo said that expectations of benign inflation this year provide room for further bank rate reductions to support economic activity.
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.
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. 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,” she explained.
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.