The Bank of Botswana (BoB) this afternoon raised interest rates by 51 basis points or about half a percentage point, with officials saying the move was necessary to manage escalating inflation expectations in the economy.
The increase, announced after a Monetary Policy Committee meeting yesterday, means any borrowers whose loans are not on a fixed rate will pay more for their repayments or new loans with immediate effect. The increase also means marginally improved rates on deposits.
The rate increase came as a surprise as the central bank had previously hinted it would wait out the prevailing high levels of inflation, arguing that these were not only transitory but mainly influenced by supply pressures, as opposed to higher local demand.
The central bank also adjusted the period when it expects inflation to return to the three to six percent target range.
“We now believe inflation will revert to the objective range by the first quarter of next year,” BoB governor, Moses Pelaelo told Mmegi during a media briefing. “We had said inflation and its sources are supply driven and there's no change in that posture. “This increase is warranted because in the medium term we are looking at the totality of the inflation profile and trajectory and where we want to be in terms of price stability."
The Bank’s Research and Financial Stability director, Lesedi Senatla said it had become apparent that higher inflation expectations were becoming entrenched in the economy, a situation that is inflationary in itself.
"The factors that led to the current inflation of 10% remain transitory, but what is not transitory are inflation expectations,” he told Mmegi. “We have seen from the latest Business Expectations Survey that businesses are beginning to feel that inflation is rising higher and higher. "In fact, they believe that in 2022, inflation will average 8.5% and then 7.5% in 2023. "In order for us to tame those expectations, we felt it was necessary to raise the signalling rate."
The increase in interest rates comes as ordinary consumers endure a torrid period marked by stagnant wage growth, higher prices of goods and services as well as unstable economic fortunes.
Pelaelo said the risk to the inflation outlook remained skewed to the upside in the short term due to rising international commodity prices, particularly oil, possible further increases in administered prices and second round effects of the recent increase in fuel prices.
Inflation has been trending at 13-year highs since January, peaking at 10.6% before dipping slightly to 10% in March. Analysts expect April inflation to come in higher due to the average P1.33 increase in petrol and diesel prices effected in late March.