Botswana cuts rate 50 bps as inflation declines

    Botswana's central bank cut its Bank Rate by 50 basis points to 5.50 percent, saying 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 economic activity without undermining maintenance of inflation within the Bank's medium-term objective range of 3-6 percent."
     It is the first rate cut by the Bank of Botswana (BoB) since August 2015 and follows a steady decline in inflation this year and an appreciation of the exchange rate of the pula since sentiment shifted in favor of emerging markets in mid-January.
    Botswana's inflation rate eased to 2.7 percent in June from 2.8 percent in the previous two months and the central bank said it is forecasting that inflation will be close to the lower end its target range in the medium term.
    In its previous statement from June 15, BoB forecast inflation would remain within its target range.
    In addition to a rise in the pula, low domestic demand and subdued foreign prices are contributing to the positive inflation outlook though the central bank said this outlook was subject to downside risks from sluggish global economic activity and low commodity prices.
    On the other hand, unanticipated large increases in administered prices and government levies along with higher oil and food prices could push up inflation.
     The exchange rate of the pula has been depreciating steadily since August 2011 but has rebounded since hitting 12 to the U.S. dollar on Jan 20. Today the pula was trading at 10.4 to the dollar, up 8.7 percent since the start of 2016.

 


    The Bank of Botswana issued the following statement:
 

"The meeting of the Monetary Policy Committee held on August 12, 2016 concluded that the outlook for price stability remains positive, with the forecast pointing to inflation being close to the lower end of the 3 – 6 percent objective range in the medium term.

Global output is projected to grow by 3.1 percent in 2016, the same as in 2015, and 3.4 percent in 2017. However, economic performance across the world remains uneven, with challenges relating to economic restructuring in both developed and emerging market economies. In addition, the heightened uncertainty arising from the recent decision by the United Kingdom to leave the European Union further constrains medium-term growth prospects.

In Botswana, real GDP is estimated to have contracted by 0.2 percent in the twelve months to March 2016, compared to growth of 3.2 percent in March 2015, thus reflecting the decline of 21.4 percent in mining production. Non-mining output increased by 3.8 percent. Inflation fell from 2.8 percent in May 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 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 economic activity without undermining maintenance of inflation within the Bank’s medium-term objective range of 3 – 6 percent. Accordingly, the Monetary Policy Committee decided to reduce the Bank Rate by half a percentage point to 5.5 percent.

Monetary policy is also aligned with the need to safeguard financial stability. In this respect, credit growth is considered to be at a sustainable level and poses no threat to financial stability.

Commercial banks must make the necessary interest rate adjustments with immediate effect to reflect this policy decision."

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