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Economist predicts no further interest rate cut

Staff Writer
An economist has said that another interest rates cut is not likely this year though, inflation is expected to fall further and settle within the 5-6 percent range in the coming months.

Addressing the media in Gaborone last week, chairman of the Bifm Investment Committee, Dr Keith Jefferis,  said that inflation which eased to seven percent in June, is set to continue declining and the rise in fuel prices in June  is unlikely to retard the fall. "I expect the annual inflation rate to fall within the Central Bank objective of between 3-6 percent and the June fuel price increase is not expected to derail the decline in inflation.

For the rest of the year, I would expect inflation to be within the 6-7 percent range, although  there remains  considerable risks from  international oil prices developments," he said at a Bifm second quarter economic report media briefing.

"I believe that in the past Monetary Policy Committee decision, we saw a very big cut of 150 percent which I believe was factored into the recent inflation decline. Therefore even if inflation  slows again, I do not see another rate cut being implemented," he said.

The speed at which interest rates have been cut is unprecedented, and the Bank Rate is now at its lowest for 18 years.

"This is appropriate, given the weak current economic environment. Furthermore, the appropriate inflation measure from a monetary policy perspective is the rate excluding

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the impact of the increase in the liquor tax in November 2008; on this measure, inflation is already below six percent, and may fall below 4 percent in coming months.

"However, it is now likely that interest rates will be on hold for a while, until there is more clarity regarding the speed of recovery of the international economy and potential inflationary pressures arising from commodity prices or exchange rate effects," said Jefferis.

Botswana inflation hit a 15 percent high last year but has considerably eased-off as international oil prices took a tumble due to the low economic activity caused by the international financial crisis and recession.

In line with falling inflationary pressures and the need to support economic activity in the recessionary period, the Bank of Botswana (BoB) has cut the bank rate four times since December  2008 and commercial banks have followed suit with corresponding cuts in the prime rate.

Although Botswana has always had relatively high interest rates in the region, the cut in the bank rate in recent months has seen the economy  enjoying the lowest real interest rates in over 10 years. The bank rate currently stands at 11.5 percent while commercial banks have reduced the prime rate to 13 percent.



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