BoB cuts interest rates to record low
Brian Benza | Wednesday October 25, 2017 18:00
The rate cut was the first since August 2016.
BoB governor, Moses Pelaelo explained that benign forecasts for both local and external inflation as well as a need to support economic activity, had motivated the rate cut.
“The current state of the economy, both the domestic and external economic outlook as well as the inflation forecast, provides scope for easing monetary policy to support economic activity without undermining maintenance of inflation within the bank’s medium-term objective range of three to six percent,” Pelaelo told journalists yesterday.
Inflation fell to 3.2% in September, the lowest since January, while government expects the economy to expand by 4.5% this year and 5.2 in 2018.
The governor said inflation was projected to remain within the three to six percent target within the medium term, with upward risks identified any substantial unanticipated upward adjustment in administered prices and government levies and/or taxes.
“For the rest of the year, we don’t expect inflation to be much different from what it is now and going into the medium term, it will fluctuate but within that three to six percent range, trending towards the lower limit,” deputy governor, Kealeboga Masalila told Mmegi Business.
The rate cut emerged from yesterday’s meeting of the Monetary Policy Committee which sits roughly every two months and charts the direction of interest rates by weighing the inflation forecast, economic growth and other factors.
The meeting, which decides bank rate movements by consensus, uses macro-economic analysis from the BoB’s research department, analyses prospective economic developments, risks to inflation, potential growth areas and other factors.
“If the risks to inflation are balanced and we see weakness in economic growth and if there is scope for monetary policy to support economic growth, we reduce the rate,” explained Joshua Sebonge, acting director of the research and financial stability department.
The reduction in the bank rate means commercial banks have to immediately lower their lending rates by 50 basis points (0.5%). The lower rate will benefit new borrowers, while existing borrowers will only benefit if they are on variable rate contracts.
The banking adjudicator, Gabriel Maotwanyane advised existing borrowers to approach their banks for advice on the implications of yesterday’s rate cut.
“It depends on a customer because some would want to maintain their repayment rates in order to shorten their repayment periods, while others would want the benefit of the rate cut, in order, perhaps, to access more credit,” he said.
Former BoB deputy governor and managing director of Econsult, Keith Jefferis said he was not surprised by the rate cut given the low future inflation forecast. “The cut was expected as it is reflective of a low inflation forecast, but I was rather surprised by the magnitude of the reduction. I would have expected a 25 basis point cut,” he said.
The BoB has been easing monetary policy in the last few years in a bid to encourage productive lending by commercial banks, but there has not been a matching increase in credit growth.
Jefferis said he does not see the latest rate cut triggering a significant response to credit growth.
Most households are already over borrowed so there is little room for them to increase debts from banks.
Besides, households never really consider the level of interest rates when taking up credit. If there is going to be any increase in credit growth, it would probably come from corporate lending, which has been on the rise anyway, in 2017, he said.