Bank of Botswana (BoB) yesterday cut the bank rate by a percentage point to a 25-year low of 6.5 percent in line with falling inflation and the growing need to spur productive lending.
The rate cut will come as a boon for borrowers as commercial banks are expected to reduce their lending rates by a similar margin, taking the prime-lending rate down to eight percent.
In the prevailing period of static real incomes, the central bank’s move will also boost the welfare of the general consumer as it comes a week after fuel prices were reduced for the second time in as many months.
Interest rates have not sunk to such low levels since August 1990 when the bank rate was raised from 6.5 percent to 8.5 percent.
In a statement released yesterday, the central bank said the current state of the economy, and both the domestic and external economic outlook, as well as the inflation forecast, provided scope for easing monetary policy to support economic activity without undermining price stability.
“Accordingly, the monetary policy committee decided to reduce the bank rate by one percentage point to 6.5 percent.
“Monetary policy is also aligned with the need to safeguard financial stability. In this regard, credit growth is assessed to be at a sustainable level, thus posing no threat to financial stability.
“Commercial banks are expected to make the necessary interest rate adjustments to reflect this policy decision,” reads the statement.
Government expects the national economy to grow by a slower rate of 4.9 percent this year, from 5.2 in 2014 with the private sector expected to take advantage of the macroeconomic environment and rive economic growth and employment creation. Total Gross Domestic Product (GDP) growth is estimated at 4.8 percent in the twelve months to September 2014, reflecting the 5.5 percent and 4.7 percent expansion in mining and non-mining output, respectively.
While the alcohol levy was increased by 5 percent in December 2014, inflation fell from 3.8 percent in December 2014 to 3.6 percent in January 2015.
According to analysts at RMB Global Markets Research, the inflation rate is likely to end the first half of the year below 3.5 percent. “Recent changes of zero-VAT on some basic food items, exchange rate changes and fuel price decreases are all deflationary and are likely to result in inflation printing lower than our previous estimate of a trough of 3.5 percent by the first half of the year,” said the experts.
The lowest ever bank rate level was 5.75% in the period 1979-81.
The Bank of Botswana last adjusted the benchmark bank rate in December 2013 to 7.5 percent as the bank looked to spur credit growth to support flagging economy.
According to the latest financial statistics, commercial banks credit grew by 14 percent from P39.4 billion in November 2013, to P44.9 billion in November 2014.
Figures released by the central bank last week show that credit growth was unchanged at 14 percent in November as business credit growth rose from 19.2 percent to 19.9 percent, while that for households declined from 10.1 percent to 9.8 percent.
Between October and November 2014, total credit extended by commercial banks increased by P615 million (1.4 percent) to P44.9 billion. This was due to the increase in loans to households by P616 million.
In the period, the share of credit to the household sector in total credit rose from 55.4 percent to 56 percent in November.