Botswana keeps lending rate unchanged at 5.5%, sees low and stable inflation

GABORONE (Capital Markets in Africa) – Botswana’s central bank maintained its benchmark Bank Rate at 5.50 percent and forecast low and stable inflation in the medium term, consistent with the 3-6 percent target range, that augurs well for accommodative monetary policy that can support lending to businesses and households.     

Bank Botswana (BB), which cut its rate by 50 basis points in August 2016, also said it aimed for a 0.26 percent upward rate of crawl of the nominal effective exchange rate (NEER) of the pula in 2017 to help stabilize the real effective exchange rate (REER) as inflation is expected to be around the lower end of the inflation range.     

In 2016 BB implemented an upward crawl of 0.38 percent as inflation was low compared with the average of its trading partners, with REER down 0.77 percent in the year to December 2016.

Botswana’s central bank operates a crawling peg exchange rate system, which was adopted in May 2005, with the exchange rate of the pula pegged to a trade-weighted basket of currencies that comprise the South African rand and the IMF’s Special Drawing Right (SDR).   

The BB has adjusted the basket weight to 45 percent for the rand and 55 percent for the SDR from 50 percent each previously.   

Against the U.S. dollar, the pula has been appreciating in the last 12 months and was trading at 10.39 today, up 2.8 percent this year.   

Botswana’s inflation rate rose to 3.1 percent in January, the highest since December 2015, from 3.0 percent in December 2016 as food price inflation rose to 3.9 percent from 0.7 percent in December 2015. Excluding administered prices, inflation eased to 3.7 percent from 4.5 percent.   

In its 2017/18 budget, Botswana’s government is forecasting output growth of 4.2 percent this year, up from an estimated 2.9 percent in 2016, with non-mining output below trend due to restrained growth in incomes, lower government spending, uncertainty about the supply of electricity, restrained economic activity of major trading partners and a sluggish recovery of the mining sector.   

Government spending in the 2017/18 fiscal year is budgeted to rise 6.5 percent, leading to a budget deficit of 1.43 percent of GDP due to a slower rise in revenues.     

In its 2017 monetary policy statement (MPS), the central bank also said that in the future there will be press briefings at the conclusion of each monetary policy committee meeting, with dates for the ensuring half-year period announced.