I am sure you may have heard people talking about the recent monetary policy changes in Botswana or the change in the way that the Prime Rate is going to be determined. It all seems quite complicated and there are many different terms being thrown about when trying to understand what is actually going on. I am going to try and explain what is happening in the simplest way possible.
First let’s start with a few definitions:
The Bank of Botswana is Botswana’s central bank
The Bank Rate is a rate that was set by the Bank of Botswana. This was a non-tradeable instrument and was used as a tool for the Bank of Botswana to influence all interest rates in the local economy.
The Inter-Bank Rate is the rate at which banks lend to each other
Prime is the rate at which a bank will lend to their most creditworthy customer. Usually, banks would charge the client prime plus a certain percentage. For example, a loan could be issued at prime plus 2 percent.
BoBCs are Bank of Botswana Certificates which are issued by the Bank of Botswana. These certificates are purchased by other banks and institutions and in return the Bank of Botswana pays the purchaser interest at a determined rate. In the past the BoBC rate was determined by an auction.
Now let’s look at what was happening in the past:
The Bank of Botswana would set the Bank Rate at their Monetary Policy Meetings that take place every 8 weeks. As mentioned, this was the rate that was used to signal policy stance. The commercial banks then used the Bank Rate to determine amongst themselves the Inter-Bank Rate, which was usually around a margin of 1.5 percent above the Bank Rate.
How have financial markets performed over the last 12 months to March 2022?
|1 Year Botswana Local shares (TR)||1 Year Botswana Local Bond Performance (Fleming Bond Index)||1 Year money market (BWP) (Overnight Call rate +2%)||1 Year MSCI ACWI (BWP)||1 Year MSCI Emerging Markets||1 Year change Botswana Pula vs US$|
What has changed?
The Bank of Botswana has done away with the Bank Rate and will now use the seven-day BoBC Rate as a mechanism to determine the rate at which banks will lend. These seven-day BoBCs will no longer be issued on auction and the interest rate at which the central bank will pay institutions who purchase these certificates will be now be at a fixed rate determined by the Bank of Botswana. Also, the BoBC rate is now called the Monetary Policy Rate (MoPR).
MoPR has now replaced the Bank Rate as the central bank’s key tool and commercial banks will now use the MoPR to determine their Prime Rate. In the past there was one Prime Rate in Botswana. However, each bank will now be free to determine its own Prime Rate. This change has been put in place to encourage competitiveness in the financial sector. We now also have something called the Interest Rate Corridor Facility. Commercial banks with accounts at the central bank will be permitted to borrow and lend money within a certain band (MOPR +1 percent/-1 percent).
Currently MoPR has been increased by 51 basis points to 1.65 percent. If MoPR is 1.65 percent, and taking into account the Interest Rate Corridor Facility, the Bank of Botswana will pay commercial banks 0.65 percent for their deposits and will lend to commercial banks at 2.65 percent. Unless there is a change in MoPR, the Inter-Bank Rate cannot go above 2.65 percent as it would not make sense for banks to pay more for money than they would pay when borrowing from the central bank. In the same way, the Inter-Bank Rate will not fall below 0.65 percent.
Economic performance around the world
|REGION||GDP Growth rate||Inflation||Interest Rates|
|Botswana||5.6% (Dec-21)||10.0% (Mar-22)||3.75% (Mar-22)|
|USA||3.4% (Mar-22)||8.5% (Mar-22)||0.5% (Apr-22)|
|Eurozone||5.0% (Mar-22)||7.5% (Apr-22)||0.0% (Apr-22)|
|UK||6.6% (Dec-21)||7.0% (Mar-22)||0.75% (Mar-22)|
|China||4.8% (Mar-21)||3.7% (Apr-22)||3.7% (Apr-22)|
What is the outcome?
Previously an increase in the interest rate wouldn’t necessarily lead to a direct or proportionate increase in the rate at which banks lend money to their customers. The reason for this lack of effectiveness is because Botswana has a long liquidity structure. This means that there is too much money in the system and the banks essentially have surplus liquidity. They therefore don’t necessarily need to borrow money from the central bank in order to lend money to their clients. This is why in the past, a change in interest rates didn’t directly translate into a change in interest rates to individuals or corporates.
Now, the Bank of Botswana can use the MoPR and the Interest Rate Corridor Facility as a more effective way to implement monetary policy in Botswana. Going forward, monetary policy is likely to become more effective. In other words, the central bank will have greater influence on the supply and demand of money. Banks’ interest rates are likely to become more responsive and react more quickly to changes in monetary policy than before.
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