BoB to overhaul interest regime

Making changes: Pelaelo PIC: MORERI SEJAKGOMO
Making changes: Pelaelo PIC: MORERI SEJAKGOMO

The Bank of Botswana (BoB) plans to replace the key bank rate with a Monetary Policy Rate based on the seven-day Bank of Botswana Certificate yield, as part of wide-ranging measures to enhance the transmission of monetary policy and reduce costs.

Central bank governor, Moses Pelaelo announced the reforms on Wednesday, saying industry consultations would begin 'henceforth' with the reforms due to take effect in the first half of the year.

The bank rate anchors all other interest rates in the country’s financial sector, with the central bank holding six meetings each year at which it can be reviewed based on inflation expectations and the outlook for economic growth. At a level below the bank rate, the BoB also holds weekly auctions of Bank of Botswana Certificates (BoBC) which help manage bank liquidity levels and thus ensure that short-term interest rates in the market are in line with the broader bank rate that has been set.

At present, the bank rate has been pegged at 3.75 percent since October 2020 while the seven-day BoBC rate was at 1.1 percent on Feb 22. The prime lending rate, which is the lending interest rate banks give their best customers, is set at one and half percentage points above the bank rate or 5.25 percent at present.

“(The changes will) enhance the potency of monetary policy transmission and desired market response to adjustments to monetary policy and operations,” he told the Monetary Policy Statement launch on Tuesday. “The reforms will designate an anchor policy rate capable of affecting liquidity management decisions of banks and thus providing a direct link to policy changes. “They will achieve an interest rate structure that fosters an active interbank market that also projects the policy stance and desired impact of monetary operations on economy-wide interest rates.”

Pelaelo said rather than the bank rate, the anchor rate for the local market would use the yield on the seven-day BoBC, which would be called the Monetary Policy Rate. The BoB will also change the auction format of the 7-day BoBC from its current multiple price system to a fixed-rate full allotment system, a move that supports the seven-day BoBCs new role as the anchor rate in the market.

The prime lending rate, however, would remain at 5.25 percent until the Monetary Policy Committee makes changes to the new anchor rate.

“In order to foster the development of a competitive financial sector, the Bank considers it prudent to allow commercial banks to independently determine their own prime lending rates,” he said. “However, to ensure an orderly and smooth transition as well as treatment of pricing of existing financial contracts and other products linked to industry prime lending rate, the current prime rate of 5.25 percent should not be changed by any bank except in the event of an adjustment by the Monetary Policy Committee of the signalling policy rate.”

The move to enhance the transmission of monetary policy comes as analysts have noted that monetary policy measures such as the lowering of the bank rate have not always resulted in the expected higher credit uptake required to lift demand in the economy. While lower interest rates generally boost consumers’ appetites for credit, analysts have noted that banks often continue to push their liquidity into the BoBCs, which are risk-free compared to riskier consumer debt.

The result has been higher BoBC auction values as the central bank mops up excess liquidity and steeper interest costs for the BoB. Excess liquidity in the banking sector is associated with inflationary pressures due to the inclination amongst banks to relax lending conditions.

It also tends to lower interest rates for depositors and generally discourage savings. Excess liquidity also limits the BoB’s ability to transmit monetary policy in the market, while also increasing the costs it incurs in attempting to absorb this excess.

According to the BoB’s latest data, outstanding BoBCs fell to P2.3 billion in December 2021, from P7.8 billion in December 2020. However, the main drivers of the difference were banks switching funds to government securities, foreign exchange sales and externalisation of funds.

Other monetary reforms planned by the BoB include establishing an interest rate corridor comprising a new Standing Deposit Facility at the BoB at 100 basis points below the Monetary Policy Rate and a Standing Credit Facility at 100 basis points above the Monetary Policy Rate.

The latest changes are some of the most comprehensive in the local market, although, for several years, authorities at the central bank have been hinting at making changes to enhance monetary policy efficacy and cost.

The BoB's Monetary Policy Committee was due to sit for the first time on Thursday, to review interest rates, amidst speculation that an increase is due, given the high levels inflation has reached.

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