23 October 2008

Botswana: BoB Decides to Keep Interest Rates Steady

On the back of an anticipated slowdown in the annual rate of inflation in the short- to medium-term, the Bank of Botswana has once again decided not to move interest rates.

BoB's Public Relations Officer, Chepete Chepete, says in a statement that while current inflation levels are still relatively high and out of the central bank's 3 to 6 percent target, optimism that inflationary pressures will ease off as the new year approaches has influenced BoB not to adjust their Bank Rate for now.

"At (a) meeting held today (Tuesday), the Bank of Botswana's Monetary Policy Committee (MPC) decided to maintain the Bank Rate at 15.5 percent," says the statement.

"While inflation remains above the Bank's objective range of 3 to 6 percent, a more positive outlook is projected. It is anticipated that inflation will decline going into 2009 and move towards the Bank's medium-term objective range."

For the first time since October last year, the annual inflation rate recorded a decline from 15.1 percent to 14 percent on the back of reductions in fuel pump prices. In the past two months, the government has reduced petrol and diesel prices by a cumulative 200thebe and 250thebe respectively in response to a decline in international oil prices from US$147 in July to around US$70 this week.

This is the second time that the MPC has decided to leave the Bank Rate unchanged after previously raising it as many times this year as inflationary pressures mounted.

In a bid to tame money supply growth, BoB twice raised the Bank Rate by 0.5 percentage points from 14.5 percent to 15.5 percent. Commercial banks subsequently raised their prime rates to 17 percent.

Although the lowering of fuel prices has cooled off inflation, BoB still fears the effects of administered prices and consumption taxes. "The outlook for declining inflation could be temporarily threatened by the effect of any increase in consumption taxes and/or administered prices," the statement continues.

"The Bank is also concerned about indications of generalised higher levels of price increases for several categories of goods and services, which are indicative of second-round effects of the past increase in fuel prices and expectations of continuing high levels of inflation."

Chepete says the second-round effects, which could be exacerbated by high levels of growth in government expenditure, credit and incomes, need to be restrained by maintaining a restrictive monetary policy. Botswana's high credit growth contrasts with the situation in other countries where lack of credit is constraining economic activity.

"In the circumstances, the Bank remains committed to responding appropriately to all economic and financial developments to keep inflation under control without undermining sustainable economic growth," he says.While there has been a suggestion from certain quarters that BoB should actively use the interest rate tool as a restrictive measure, many analysts have voiced their concern against increasing the Bank Rate, which is already high compared to other countries.

On the other hand, the school of thought that interest rates cannot counter inflationary pressure emanating from outside, such as fuel and food prices, has given weight to the monetary authorities' decision not to adjust the Bank Rate.

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