Excess liquidity in the banking sector is associated with inflationary pressures due to the resultant inclination amongst banks to relax lending conditions, and tends to lower interest rates for depositors and generally discourage savings.Excess liquidity also limits central banks' ability to transmit monetary policy in the market, while also increasing the costs they incur in attempting to absorb this excess and, thus, peg interest rates and trends. Yields (interest) on the BoB's primary instrument for mopping up this liquidity, the Bank of Botswana Certificates (BoBC) have risen at each auction in the past seven weeks, raising the BoB's interest expenses.On Tuesday, the yield on the 14-day BoBCs reached 4.56 percent, a level last seen in December 2011 with indicators that banks were finding other assets to invest in. Low competition among banks for BoBCs generally raises yields.
In 2010, the BoB's annual interest expenses were pegged at P1.3 billion, declining to P933 million last year, after it introduced two measures to statutorily slash excess liquidity in the banking sector.Interest expenses averaging P1.7 billion between 2006 and 2010, raised outrage in economic circles, with some commentators slamming the BoB for utilising what are essentially taxpayer funds, to support commercial banks. Deputy BoB governor, Oduetse Motshidisi said the central bank would look for similar measures this year."We will continue to look at measures or opportunities to reduce excess liquidity," he told Business Week during a recent briefing.
