Exciting news for borrowers

SHARE   |   Monday, 15 August 2016   |   By Kabelo Adamson
Central Bank Governor, Linah Mohohlo Central Bank Governor, Linah Mohohlo

Bank of Botswana (BoB) on Friday slashed the bank rate by 50 basis points to 5.5 percent from 6 percent, sinking it to record lows to promote economic activity and consistent with the prevailing economic conditions. The reduction by 50 basis points comes a year after the MPC took a similar decision to cut the bank rate by the same points in August last year to 6 percent. The decision spells bad news for commercial banks while it is music to the ears of sectors such as retail, mining and property among those that stands to benefit heavily from the rate cut, according to those familiar with issue. According to the statement from the Bank of Botswana relating to the matter, the current state of the economy and both the domestic and external economic outlook as well as the inflation forecast provide scope for easing monetary policy to support activity without undermining maintenance of inflation within the Bank’s medium term objective rang of 3 – 6 percent. Accordingly, commercial banks have been requested to make necessary interest rate adjustments with immediate effect. Speaking over the phone on Friday afternoon, former Bank of Botswana Deputy Governor and now Managing Director at Econsult, Dr Keith Jefferis explained that the reduction would mean the banks’ prime lending rate would be reduced as well and any interest linked to the rate will have to be cut as well.

Jefferis said anyone who is servicing a loan such as those paying for a mortgage for example from any lender would find the news exciting as interest to their loan facilities would be cut. According to Jefferis, commercial banks will be worse off as the reduction would negatively impact on their margins, further adding that sectors such as mining and the property would also benefit from the cut. An analysis of the bank rate cut from Garry Juma – Head of Research at Motswedi Securities – indicates that the cut in the bank rate was always expected given the slow growth of the domestic economy and it was just a case of when it will happen. Botswana’s GDP is estimated to have contracted by 0.2% in the twelve months to March 2016, compared to the growth of 3.2% in March 2015, reflecting a decline of 21.4 percent in mining production. Non mining output increased by 3.8 percent. According to Juma, Botswana is not alone in this rate reduction cycle as several major central banks have done so in recent times. In January this year, the Bank of Japan is said to have surprised markets with a move to negative interest rates in order to encourage banks to step up lending to support activity in the real economy, rather than pay a penalty to deposit excess cash at the central bank.

As recent as last week, the Bank of England also took global markets by surprise by cutting interest rate for the first time in more than seven years from 0.5 percent to a new historic low of 0.25 percent. “The world economy, excluding the USA, is not looking good. Fresh economic data from China on retail sales, industrial output and trade data points to a slowdown in China’s economy. We have every reason to be worried by these not so good statics as China is the second economy in the world and the major consumer of commodities,” Juma said in an emailed analysis. Despite these entire rate cut happening in several markets, the opposite is reportedly taking place in the USA. Juma said the US Federal Reserve began tightening monetary with the first interest rates increase in nearly a decade in December 2015 and another interest rate increase is widely expected before the end of this year due to improved labor market conditions and the likelihood that inflation is heading higher. Though the reduction will give borrowers such as mortgage holders a reason to smile, the cut is another hard pill to swallow for commercial banks as it will reduce banks interest margins further. FNBB, a listed lender and the largest bank in terms of market capitalization, recently issued a cautionary statement to the effect that it expects lower profits, and this is just one of the examples that Juma feels would be further worsened by the reduced bank rate.