- It would further hinder the domestic economy’s post COVID-19 recovery
- Higher interest rates impact on government’s cost of borrowing
Should inflation continue rising through the short-term and remain above the Bank of Botswana’s (BoB) 3-6 percent objective range for longer than current medium-term expectations, in addition to rising global rates, further increases in interest rates would be expected from the BoB, a Q2 report by Econsult Botswana has warned.
Compiled by economists Sethunya Kegakgametse and Kitso Mokhurutshe, the report cautions: “This, however, would not be ideal as it would further hinder the domestic economy’s post COVID-19 recovery efforts.” At its 16 June 2022 meeting, BoB’s Monetary Policy Committee (MPC) raised the rate by 50 bps to 2.15 percent, the second successive rate hike this year. The MPC held the interest rate at its February meeting but hiked it by 51bps at its April meeting. Analysts have pointed to fears of rising food, fuel and energy prices and rising interest rates leading to significant demand destruction.
But the Deputy Governor of the Bank of Botswana, Dr. Kealeboga Masalila, has said “even in saying we deal decisively with inflation by using tools at our disposal, we do not at this juncture believe that we are negative on growth by so doing”. Although rates have been increased by 101 basis points this year, Masalila still believes they remain modest yet and, in his view, accommodating. “They accommodate productive borrowing as well as investments while at the same time moderating demand that can be inflationary,” he said.
He emphasised that any policy response has to be measured and calibrated to what is happening: what you can impact and also considering other unintended consequences. The key phrase that he repeatedly emphasised was “well measured and calibrated”, adding that it also has to be well coordinated with other stakeholders. The central bank reiterated that it is cautious not to damage growth or, as alluded to by economists, scare demand and production prospects. “We don’t want to do that,” Masalila said.
Fitch Solutions forecast that the Bank of Botswana will hike the monetary policy rate by 150 basis points (bps) to 3.65 percent in the second half of 2022. Fitch expects BoB’s tightening cycle to spill over into 2023, anticipating the bank to raise the monetary policy rate by another 50bps to 4.15 percent. Kegakgametse and Mokhurutshe of Econsult argue that the higher interest rates will also impact on the government’s cost of borrowing because short-term borrowing rates (Treasury Bills) have already increased along with BoBC rates. “Longer-term bond rates are unchanged over recent months, but whether this is sustainable depends on the market’s ongoing demand for bonds relative to Government’s borrowing requirements,” the two wrote.
The annual headline inflation rate reached 12.7 percent in June 2022, its highest level since January 2009. This has been driven by an increase in global food and energy prices during Q2 2022. As a result of the Russia-Ukraine war and the supply-side shortages of crude oil, Kegakgametse and Mokhurutshe observed that international fuel prices continued to surge upwards during Q2 2022, with the spot price of Europe Brent crude oil rising by 20.8 percent during the quarter.
“Subsequently, the Botswana Energy Regulatory Authority (BERA) had to adjust fuel prices upwards twice during the quarter in order to align with international prices. In total, local retail pump prices were adjusted as follows: Unleaded 93 (341t per litre), Unleaded 95 (358t per litre), Diesel (402t per litre) and Paraffin (573t per litre),” they wrote in a recnt article, noting that local food prices, along with utility and rental prices, also continued to rise during the quarter. Inflation is projected to remain above 10 percent until Q2 2023, only reverting to within BoB’s 3-6 percent objective range towards the end of 2023.
