The decision by the central bank to lower the interest rate continues to benefit the economy in many aspects. A quarterly economic review done by University of Botswana (UB) economists commissioned by Stanbic Bank suggests that evidence from trends indicate that the interest rate cuts continue to benefit the economy by lowering debt burden on borrowers and encouraging prudent lending.
The report says the reduction in the interest rate boosts aggregate demand through investment and household consumption, moderating the interest rate spreads towards those of other African middle income countries without discouraging savings. This year alone Bank of Botswana has cut the bank rate on two occasions to spur lending. In February the rate was reduced by 50 basis points to 6.5 percent and later in August by a further 50 basis points to 6.0 percent.
The other reason why the reduction is worthy for a celebration, according to the report, is that it has to do with the wealth effect associated with the increase in the stock market. The analysis on whether the rate cut should be celebrated done by Obonye Galebotswe from the Department of Economics at UB says the fall in the bank rate influenced other interests rates such as deposit and lending rates to move in the same direction.
According to Galebotswe, this might imply lower rates of interest on savings accounts, which might discourage savings. But on the contrary, for a borrower, a fall in the lending rate means it becomes cheaper to borrow for either investment or spending and in the short-run savers may lose while borrowers gain. The lower interest rate is also expected to help the economy by increasing the rate of investment.
“This could either be through investment of profits rather than saving them or through borrowing from the banks,” says Galebotswe. It is said that the GDP by type of expenditure shows that household final consumption and gross capital formation have been the main drivers of economic activity since 2009. Moreover, it is stated that the combination of continued increase in the demand for loans and decline in the supply of loanable funds led to a temporary increase in deposit rates as banks tried to attract savings.
It is argued that the bank rate cut has not really translated into loses on the part of savers and has also assisted in fighting liquidity as banks switched to lower risk borrowers. Even though the reduction in the interest rate has been welcome development to the consumers, commercial banks have continually complained about the reduction in the lending rate and resulted in the banks taking a knock on their margins.
Despite the two reductions that took place during the year, the interest rate spread of Botswana’s banking sector still remains above that of other upper middle income African countries such as Mauritius, Namibia and South Africa. It is, however, acknowledged that there are encouraging signs that the spread is converging towards those of the mentioned countries while on the other hand Botswana’s deposit rate remains the lowest of the four countries. This is considered as an indication that local banks still have room to attract more savings by raising their deposits rates closer to those of other countries.