The central bank is expected to raise its interest rate next year to keep inflation in check, an independent reaserch firm, BMI Research said.
The firm forecasts that Bank of Botswana (BoB) will adopt a more hawkish bias in 2024 and hike the policy rate by 25 basis points to 2.90 percent.
“We expect inflation to stabilise within the central bank’s target over the coming year – averaging 3.3 percent. This is supported by our view that oil prices will moderate from the October 27 spot rate of USD89.1/bbl, which will keep inflationary pressures contained,” BMI said.
Furthermore, BMI sees a tighter monetary policy playing a key role in reducing pressure on Botswana’s crawling peg arrangement and limiting the risk of a resurgence of inflationary pressures in the coming year. Meanwhile, BMI Research holds a fairly strong outlook for economic growth in 2024.
“We forecast that the economy will expand by 4.4 percent, up from a projected 4.1 percent in 2023,” said BMI Research.
The firm also struck an optimistic chord about the just ended De Beers – Botswana government diamond deal, saying the deal will see fixed investment increase to 6.5 percent in 2024, up from a forecasted 3.9 percent for 2023, while stable inflation and historically low interest rates will support household spending.
It said this would allow the BoB to normalise monetary policy, which will give the central bank greater scope to cut rates in response to potential future economic shocks.
“Risks to our interest rate forecasts are titled to the upside. An escalation in the Israel-Hamas war could increase oil prices beyond our current projections and put upside pressure to headline inflation in Botswana,” said the research firm.
In addition, BMI said a stronger-than-expected El Niño (which typically brings drier conditions to Southern Africa) could weigh on crop production and increase food prices.
“In either scenario, we believe that the BoB would adopt a more hawkish bias than our baseline forecast assumes. Furthermore, an unexpected rate hike from the South African Reserve bank on November 24 could also influence the BoB’s monetary policy stance,” the consultancy firm said.
BMI believes that the BoB will keep its policy rate at 2.65 percent over the remainder of 2023, in line with the October decision to hold. It said inflation will remain comfortably within the BoB’s 3.0-6.0 percent target range over the coming months, reducing the need to tighten monetary policy before the end of 2023.
“However, we believe that stable inflation and stronger economic growth will provide the central bank with greater scope for rate normalisation in 2024. As such, we forecast that the BoB will increase rates by 25 basis points to 2.90 percent by the end of 2024,” said BoBs.
Analysts at BMI said; “We believe that the Bank of Botswana (BoB) will keep its policy rate at 2.65 percent over the remainder of 2023.”
It said in line with its expectations, the BoB maintained the policy rate at 2.65 percent in October, stating that the economy was operating below capacity and that it was not generating demand-driven inflationary pressures. “The October interest rate decision marks the seventh consecutive hold in Botswana,” BMI said adding that “We expect that the BoB will continue to hold its policy rate at 2.65 percent at its next MPC meeting on December 7 2023. In September 2023, inflation increased to 3.2 percent y-o-y, from 1.2 percent in August, returning to the Bank of Botswana’s target range of 3.0-6.0 percent.”
“We forecast that inflation will trend upwards over the remainder of 2023 – ending the year at 3.8 percent y-o-y – as we expect the Botswana Energy Regulatory Authority to upwardly adjust fuel prices in response to the September spike in oil prices,” BMI said.
That said, BMI believe inflation will remain comfortably within the central bank’s inflation target range, reducing the necessity to raise interest rates at the final Monetary Policy Committee (MPC) meeting Iin December this year.
Meanwhile, BMI said the Bank of Botswana has highlighted concerns about growth, in part caused by decelerating global demand for diamonds, evidenced by the decision of state owned Okavango Diamond Company to temporarily halt rough stone sales (in order to support prices).
“However, we believe it is unlikely that the central bank will cut the policy rate in December, given that interest rates are already low as wel as the rising inflation risks as a result of recent instability in the Middle East. Inflation will stabilise within target in 2024,” said BMI.
