Hoorah! Interest rates fall

Staff Writer | Wednesday June 24, 2009 00:00

 

This is the fourth time that the Central Bank has reduced the bank rate since December 2008 as inflation, which also eased by 1.8 percentage points last week,   has been declining due to slower economic growth levels as well as falling fuel prices.

Inflation peaked at 15.1 percent late last year, but it has been on a downward trend, settling at the single digit plateau of 8.4 percent in May.

Commercial banks are expected to lower their rates by the same margin bringing the prime rate to 13 percent.

Although Botswana has always had relatively high interest rates in the region, the decline in bank rates in recent months suggests that the economy will enjoy the lowest real interest rates in more than 10 years.

Announcing the decision to reduce the bank rates, BoB public relations officer, Chepete Chepete, said that although inflation continues to be above the bank's objective range of between three and six percent, it is expected to maintain a downward trend in the medium-term. 

'Factors underlying the overall positive outlook for inflation include the world-wide economic recession as well as the projected below-trend performance of the domestic economy. 

'The potential for an increase in administered prices and international fuel prices constitutes an upside risk to the outlook.  However, the current subdued global economic activity and the associated low inflationary environment, with deflation in some major economies, as well as the weak domestic economic performance, should contribute to lower inflationary pressures,' he believes.

Speaking at the World Economic Forum in Cape Town recently, BoB governor, Linah Mohohlo, said there was still scope for further reductions in interest rates in the country as inflationary pressures were still easing off.

Although the Central Bank has reduced interest rates three times since December, analysts still believe there is scope for more decreases because the bank rate should be around 10 percent by year's end.

However, the BoB is likely to be watching developments on the international markets closely as the early signs of an economic recovery have led to increases in oil prices.

Oil rices, now hovering around US$70 per barrel from an average of US$50.18 a barrel in April, have led to subsequent fuel pump price increases here as well, which might lead to the building up of new inflationary pressures.

In reducing interest rates, the bank says it recognises that the favourable inflation outlook continues to exist in the medium term, which is the relevant time frame for monetary policy, and provides scope for monetary policy flexibility.

'The bank remains committed to responding appropriately to all economic and financial developments to achieve medium-term price stability, which contributes to long run sustainable economic growth,' added Chepete.