BoB policy compels change of strategy

MBONGENI MGUNI
Staff Writer | Friday September 10, 2010 00:00

 

In its Mid-Term Review of the Monetary Policy Statement released last Friday, BoB hints that the prevailing low interest rate regime will continue to support an economy whose recovery is buffeted by reduced government spending, low consumer demand, constrained incomes and depressed output.

With BoB lowering interest rates five times last year and inflation rising between December 2009 and July 2010, real interest rates - or the actual yield due to commercial banks from their lending activities - have been moving towards negative territory. While the trend is a godsend to borrowers, it bodes ill for the country's nine commercial banks whose profitability has traditionally been anchored on interest income, the banks leveraging off the spread between deposit and lending rates. The Mid-Term Review indicates that real interest rates fell in the first half of 2010, with the real prime lending rate 'easing from 5.39 percent in December 2009 to 3.53 in the same period'.

As the drop in real interest rates is linked to rising inflation, BoB says its neutral monetary policy will continue going forward because inflation is expected to ease towards the target 3 - 6 percent range by the first half of 2011.The central bank says factors behind the rise in inflation this year are largely transitory and that barring any threats, inflation will decline towards the end of the year and into 2011. These factors include increases in VAT, electricity and fuel, while possible threats include large increases in other administered prices, government levies and higher inflation expectations. BoB says the declining inflation rate should support other economic indicators such as the Pula exchange rate, which is expected to stabilise following its general slide against other hard currencies in 2010.

'The expected developments in the real exchange rate and real interest rates suggest a slight easing of real monetary conditions in the short-term, but the trend going forward suggests that monetary policy remains neutral in the medium-term,' it says.

'Overall, the current state of the economy and the assumptions regarding both the domestic and external economic outlook, along with the inflation forecast, suggest that the prevailing monetary policy stance is consistent with the achievement of the 3 - 6 percent inflation object in the medium-term.'

With only two meetings of BoB's Monetary Policy Committee left this year, a neutral monetary policy suggests no adjustment to interest rates. In their recent results, commercial banks such as First National and Barclays announced their intentions to move away from reliance on interest income because BoB policy forces a paradigm shift in the banking industry. Three of the 'big four' in Botswana - FNBB, Barclays and Standard Chartered  - are listed on the Botswana Stock Exchange, while the fourth major player, Stanbic, is not and is thus not obliged to publicly release and make statements on its results. Standard Chartered Bank Botswana is yet to release its interim results, but it is expected that its directors are also considering a shift from interest income.But BoB says its monetary policy stance is not cast in stone. 'This policy stance could, however, change in response to indications that any expectations of high inflation are becoming entrenched,' the central bank says.

'The Bank will continue to monitor economic and financial developments with a view to responding appropriately to ensure medium-term price stability without jeopardising the anticipated economic recovery and growth.'