Bank rate: Double-edged sword

SHARE   |   Thursday, 28 June 2018   |   By Kabelo Adamson
Bank rate: Double-edged sword

Over-indebted households can’t borrow more; depressed economy means businesses can’t borrow much as well 

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Despite the bank rate having been at the lowest for almost a year now, credit extension by commercial banks to both businesses and individuals is not to be growing proportionally to the decrease in the rate.

At the meeting held on Tuesday, the Monetary Policy Committee (MPC) of the Bank of Botswana (BoB) decided to maintain the bank rate at 5 percent.

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The Governor of the Central Bank Moses Pelaelo said the current state of the economy and the outlook for both domestic and external economic activity suggest that the prevailing monetary policy stance is consistent with maintain inflation within the objective range of the 3 - 6 percent.

Consequently, he said, the MPC decided to maintain the bank rate at 5 percent. Research analyst at Motswedi Securities, Moemedi Mosele, said in terms of its impact on credit extension, the effect is minimal as lenders have also adopted stringiest measures towards lending.

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“As nationals we are heavily indebted and banks do not want to take more risks by giving credit to risky customers,” said Mosele, saying the lower interest is a double-edged sword. Due to high household indebtedness, Mosele said there is little room for credit extension.

On the business side, he said due to the economy being depressed, businesses cannot borrow with nothing to do with the money, meaning that credit extension on the business side would not grow as much.

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Mosele does not see any increase soon and expects it remain at the current levels for months to come. He said if anything there would be a smaller downward adjustment.

“Given the outlook of the central bank that it is positive and the economy does not bounce back, we are likely to not to see any increase soon,” said Mosele, adding that if the state of the economy does not register a positive improvement, this could be the new normal.

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While the lower bank rate might not have impacted positively on credit extension, the lower rate has other benefits, specifically to those who are already servicing their loans.

Homeowners are some of the biggest winners from the lower bank rate as the lower interest rate would mean lower monthly mortgage payments for homeowners as the cost of paying monthly mortgage becomes relatively low. Savers, on the other hand, tend not to benefit much from lower rates as the money they have saved in banks gain lower interest rate.

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On the economy as a whole, lower interest rates are supposed to help boost the economy as cost of borrowing become cheaper, however latest information from the central bank indicates that credit extension has slowed.

Bank of Botswana executives have indicated that the projected economic growth is likely to be attained this year. The economy is expected to operate close to, but below full capacity in the medium term.

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This will be driven by the non-mining sectors such as the accommodative monetary conditions in the domestic economy and expansion in government expenditure as well as relative stability in water and electricity supply.

However, the central bank has observed that protectionist trade policies, potential build-up of financial vulnerabilities induced by easy financial conditions, geopolitical tensions and adverse weather could negatively affect the medium-term growth prospects.

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Against the backdrop of higher commodity prices and more positive investor sentiment, growth is still expected to better in 2018 than in 2017. The economy is expected to register growth of 4.7 percent and 5.3 percent in 2017 and 2018 respectively.    



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