Following its recent decision to maintain rates, the Bank of Botswana (BoB) is expected to reduce interest rates once more in 2024. According to Business Monitor Internationalโs (BMI) latest report, another rate cut is likely before year-end as part of BoBโs ongoing efforts to support economic growth amid global uncertainties and domestic challenges.
โWe expect the Bank of Botswana (BoB) to cut the policy rate by 25 basis points (bps) to 1.65 percent at its final meeting in December,โ BMI analysts noted.
On November 7, BoB held its main policy rate at 1.90 percent after a 25-bps cut in August. โThe hold decision was against our forecast of a cut, prompting us to revise our year-end rate forecast from 1.40 percent as we still expect a final rate reduction in December,โ BMI analysts said.
Explaining its hold decision, BoB stated that โprospects for economic growth remain limitedโ and that โthe economy will continue to operate below full capacity in the short term,โ while forecasting โinflation to remain low into the medium term.โ
BMI anticipates a December rate cut given that inflation remains low and stable, dropping from 3.9 percent in August to 1.5 percent year-on-year in Septemberโwell below BoBโs target range of 3.0โ6.0 percent. โWe expect price pressures to remain limited through the year-end as global food and fuel prices decrease, with transport and food inflation comprising 37.0 percent of Botswanaโs consumer price index,โ BMI analysts added.
BMI highlights that Botswanaโs economic growth is in contraction, largely driven by weak global diamond demand.
ย โOverstocking by retailers led to a collapse in diamond prices throughout 2024, resulting in real GDP contractions of 5.3 percent year-on-year in Q1 and 0.5 percent in Q2 2024,โ BMI reported.ย
Preliminary sales data from Debswana Diamond Company showed a 52.0 percent year-on-year decline in rough diamond sales for Q1โQ3 2024, reinforcing BMIโs full-year 2024 growth forecast of a 1.5 percent contraction.
โThese conditions will likely prompt another rate cut by BoB in December to support development goals while price stability is achieved,โ BMI analysts stated. They project BoB will normalise the policy rate in 2025, with an anticipated 75-bps increase to 2.15 percent by year-end. Inflation is expected to rise to an average of 3.8 percent in 2025, partly due to higher global wheat prices and base effects. Economic growth, they forecast, will rebound to 3.8 percent as excess diamond supply subsides, allowing prices to rise and Botswanaโs mining sector to increase production.
Currently, BoB is focused on mitigating the impact of a mining downturn through low interest rates. In a higher-growth environment, however, BMI expects the BoB will aim to narrow the interest rate differential with the South African Reserve Bank (SARB). โThe Botswana pula is partially pegged to the South African rand, meaning BoBโs interest rate decisions are influenced by SARB, as Botswana has virtually no capital controls,โ BMI explained.
Despite this peg, Botswanaโs substantial foreign reserves provide BoB with the flexibility to deviate from SARBโs policies when prioritising domestic economic factors. Looking forward, BMI expects that, by 2025, stronger growth and higher inflation will support BoB in reducing the rate gap with SARB, rebuilding reserves, and creating room for potential future rate cuts if economic shocks arise.
