Bank of Botswana (BoB) on Thursday reduced the bank rate for the second time in six months. The BoB Monetary Policy (MPC) reduced the bank rate by half a percent to 6 percent and means all commercial banks are similarly required to make necessary interest rate adjustments to reflect the policy decision. In a statement, the bank said the current state of the economy as well as the domestic and external outlook, including the inflation forecast, suggest that easing monetary policy is a step in the right direction and would be consistent with maintaining inflation within the bank’s medium-term objective range of 3-6 percent.
“Accordingly, the Monetary Policy Committee decided to reduce the bank rate by half a percent to 6 percent,” the central bank said.
The news, according to observers, spells doom to the commercial banks which already have been facing challenges related to the low bank interest rates.
Head of Research at Motswedi Securities, Garry Juma, said the decision is bad news to the commercial banks. “All the listed commercial banks have already released cautionary statements to the shareholders warning about the expected lower financial results due to the subdued environment,” Juma said in an interview.
This week Barclays Bank became the latest bank to issue a cautionary statement against such expectations following Standard Chartered Bank and FNBB.
While the latest reduction does not qualify as the lowest ever bank rate, it is equally a huge a blow to the commercial banks’ projections on profitability.
Juma said the latest interest reduction is a blow which will further reduce the commercial banks prospects of making profits. “The banks are already competing for deposits and we have already seen the likes of StanChart offering a huge percentage of interest rate as way to attract deposits and this really means banks are in trouble,” Juma said.
He explained that the latest reduction in the interest rate will only serve to further deplete the banks’ ability to preserve more funds for lending.
“The banks usually use deposits to fund their loan books and if there is lack of deposits, where are they going to get the funds to fund their loan books?” Garry asked but added that the current scenario in the banking industry will continue as long as the bank rates remain low and continues to be reduced.
This week, Barclays Bank said in a notice to shareholders that the consolidated results for the period ended 30th June 2015 will be lower than those reported for the previous corresponding period. The bank links the decline in profits to the challenging trading environment which has tightened overall margins.
This, according to Juma, is a testimony to the challenges faced by the commercial banks in the local banking sector.
A research analyst at Imara Securities, Ndgoya Chimbwete, agrees with Juma in terms of the implications of the reduction in the interest rate. He says even though the reduction is good news to the bank customers, on the other hand, it is bad news to the banks themselves. “The banks yield what they charge to their clients and low interest rates mean they would not be able to produce as much revenue as otherwise they could have wished,” said Chimbwete.