Gaborone — Bank of Botswana (BoB) has slashed the bank rate by 50 basis points to 5.5 per cent as inflation continues to be within its medium-term objective range set at 3- 5 per cent.
The central bank states that real GDP is estimated to have contracted by 0.2 per cent in the 12 months to March 2016, compared to growth of 3.2 per cent in March 2015, reflecting the decline of 21.4 per cent in mining production. Bank of Botswana notes that non-mining output increased by 3.8 percent while inflation fell from 2.8 to 2.7 percent in June 2016.
“Low domestic demand pressures and subdued foreign price developments contribute to the positive inflation outlook in the medium term. This outlook is subject to downside risks emanating from sluggish global economic activity and the consequent low commodity prices. It could, however, be adversely affected by any unanticipated large increase in administered prices and government levies as well as international oil and food prices beyond current forecasts,” the Bank notes in a press release.
The Bank notes that the current state of the economy and both the domestic and both the domestic and external economic outlook as well as the inflation forecast provide 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. It is noted that credit growth is considered to be at sustainable level and does not prose threat to financial stability.
Meanwhile, Mr Garry Juma of Motswedi Securities has said the cut in the bank rate was expected given the slow growth of the domestic economy adding the only uncertainty was on the timing of the cut. The last rate cut was a year ago.
“Inflation if currently contained mainly due to low domestic demand and subdued foreign price development,” he said in a statement released following the bank cut.
Mr Juma said food prices have however been creeping up pushed by the El Nino induced drought which has been described as the worst in 35 years by the UN Office for the Coordination of Humanitarian Affairs.
He notes that other central banks have also reduced their rates, like in England where the interest rates have been cut for the first time in more than seven years from 0.5 percent to a new historic low of 0.25 percent.
The cuts show that the world economy, excluding the US, is not looking good. Mr Juma said fresh data from China on retail sales, industrial output and trade points to a slowdown in China’s economy. “We have every reason to be worried by these not so good statistics as China is the second largest economy in the world and major consumer of commodities,” he notes.
The US economy however things are opposite. The US Federal Reserve began tightening monetary with the first interest rates increase in nearly a decade in December 2015 and another rate increase is expected before the end of this year due to improved labour market conditions and the likelihood that inflation is heading higher.
For local banks, this is another hard pill to swallow, Mr Juma said as it would reduce their interest margins further.
“Since the Bank of Botswana loosed its monetary policy local banks interest income and profitability has been falling,” he said. Mr Juma said deposits might also decline as investors will be discouraged to save due to lower returns. The low rates are also not expected to result in an increase in credit growth.
“Although we long entered an era of ultra-low interest rates in the history of the country, credit growth especially to productive sectors of the economy has not picked up as much as we would like,” he said.
On the plus side, the cost of capital for business growth has gone down which was good, he said and mortgages repayments will also be reduced.
Source : BOPA