The Bank of Botswana (BoB) Monetary Policy Committee this week Tuesday took a decision to slash the bank rate by 50 basis points in a bid to spur economic growth. This week’s reduction comes just over a year after the Committee reduced the bank rate by 50 basis points to 5.5 percent while the Tuesdays reduction to 5 percent, a record low according to the Central Bank led by Moses Pelaelo. Research Manager at Motswedi Securities, Garry Juma said in an interview on Friday that it would be difficult, in the absence of any empirical evidence, to measure the effects of the low interest rates environment in inciting economic activity. Announcing the MPC decision, Pelaelo said the current state of the economy, both the domestic and external economic outlook as well as the inflation forecast, provides scope for easing monetary policy to support economic activity without undermining maintenance of inflation within the bank’s medium-term objective range of 3 – 6 percent. As a result, he said, the MPC decided to reduce the bank rate by 50 basis points to 5 percent. Juma said at Motswedi Securities they have been consistent that another reduction in the bank rate was on the horizon but did not expect such huge cut. Asked if there is any further room for another reduction, Juma said he does not see that happening as now the rate has reached a record low and does not see it going down anymore. Whether or not the bank rate will be maintained at the current level will only be known after the MPC’s next meeting on December 18. Juma said with inflation expected to be lower at 3 – 4 percent for the medium term, this therefore rules out any possibility of a further reduction in the bank rate. Juma said the central bank has to maintain a balance between stimulating economic activity and banks’ profitability. “Generally when you cut the bank rate you lessen the burden on consumers,” he said, explaining that the extra money that borrowers would save as a result of adjusted interests could be used on other things which can encourage economic activity.
According to Juma, currently the whole debt to bank stands at P30 billion and savings that would be accrued from that figure would be huge to enable borrowers to use that extra money in other areas of the economy. An economist at FNBB, Moatlhodi Sebabole, said they were surprised by this week’s bank rate cut. “The magnitude of 50bp reduction is a surprise. As FNBB, we expected at most, a 25bp cut given the real rate differential with trading partners. We had also expected the cut to come in 3-5 months’ time, especially given the uncertainty around the direction of rate movements by South African Reserve Bank,” Sebabole said on Friday. When asked if the low bank rate environment has been able to spur economic growth, Sebabole said there has been an erosion of the signaling effect of the bank rate overtime. “Whereas the central bank has cut rates by a cumulative 10% since end of 2008, the recent cuts have not necessarily resulted in improvement in credit growth numbers. In fact, credit growth has slowed to around 4% compared to double digit growth in past years,” said Sebabole, adding that this indicates that consumption and investment which is fuelled by advances has come under pressure. According to Sebabole, the low interest rate environment has also not boosted consumer and business confidence as growth pressures remain. “The cost of credit for new loans has also increased despite the decreasing bank rate, as banks continue to price more for risk,” he said.
Sebabole said the low interest environment might see an increase in demand for credit increase given the reduction in rates.“Individuals with existing loans might apply for re-financing to take advantage of reduced rates, however, the level of economic activity might mean that qualification for loans might be limited, especially for individuals who are almost fully borrowed,” Sebabole opined.On whether he sees the bank rate further down Sebabole said at FNBB, they now see limited room for further cutting of the bank rate, given risks to outflows in a low interest rate environment as well as concerns over interest rate differentials – mostly with South Africa, whose repo rate is at 6.75 percent.“We expect the Bank of Botswana to leave rates unchanged at 5.0 percent for the rest of 2017, and for most of 2018,” he said.He said they forecast credit growth at 6.5 percent in 2017, compared to 4 percent in 2016. “Weak demand prospects, pressures on household purchasing power and weak cyclical growth imply investment and credit growth will remain under pressure in the short- to medium-term,” Sebabole said.He said they note that risks to outflows on money markets will deter any strong dovish reactions to falling inflation trends. “We therefore expect yields to be under pressure to fall further in the December government bond auction,” he said in conclusion.