Economic observers were on Wednesday night pessimistic that Bank of Botswana’s (BoB) decision to cut bank rate for the second consecutive time would bolster economic growth.
In a surprise decision aimed at boosting growth prospects, BoB Monetary Policy Committee (MPC) on Tuesday announced it has slashed bank rate by 0,5 percent to 8,5 percent, after an April cut by the same margin. In making the adjustment, the bank explained that the economic situation, which is characterised by output below potential and high unemployment, provides an opportunity for a non-inflationary stimulus to the economy. The rate was lowered in April for the first time since December 2010. “In terms of economy, I am a bit pessimistic that a rate cut will positively affect growth,” Amit Bakhirta, a fund manager at IPRO Botswana said. The economy expanded 3.7 percent in 2012, with growth in non-mining industries easing to 5.8 percent from 7.8 percent in 2011, while mining contracted by 8.1 percent. Economic growth may slow this year because of falling diamond prices, which threaten government revenue and budget surplus, economists have said.
World Bank has recently downgraded the country’s economic growth for 2013 from an earlier 5.1 percent to 5 percent. The latest revisions are contained in the Global Economic Prospects (GEP) report published last week. Bakhirta contends that rate cuts are only relevant in certain markets not ours, at least for now. “The banking industry is already facing an excess liquidity situation. Many people are already in debt,” he stated. A cut in bank rate will only help those who are currently repaying loans, he contended. “They (MPC) could have cut the rate by 1 percent, May be that could have helped,” suggested Bakhirta. An investment analyst from one of the leading asset management companies said the rate slash would only stimulate growth in the short term. “Companies will benefit by accessing loans at lower rates to increase production, but disposable income by prospective customers remains stagnant. People are now focussing on buying core goods and services,” said the analyst.
Inflation retreating to objective
Meanwhile, May inflation declined to 6,1 percent, from 7,2 percent in April, catching many by surprise. This is the lowest inflation recorded by the country in more than three years. An analyst said that inflation was able to move close to the bank’s 3-6 objective partly because of weak economic sentiments. “Inflation is affected by economic growth. Companies are still very disappointed by power cuts which have affected production to a large extent,” explained the analyst. The country has been plunged into power cuts in more than six months, but Botswana Power Corporation still proceeded with a 30% tariff hike. “When the economy slows, people tend to spend cautiously and this forces some companies to cut prices in a bid to increase.
The cut in prices has a negative impact on inflation,” the analyst said. Inflation has been outside the central bank’s objective in more than three years. Does the Monday fall in inflation mean Linah Mohohlo will finally have the last laugh? Bakhirta, who is a big critic of the bank’s monetary policy, did not rule out the possibility of inflation climbing to the upper range in the short term. “It will appear inflation may stabilise and then rise again in the next few months,” said Bakhirta. However, he was quick to point that if inflation falls, then goes above the bank’ range again, ‘then that will not be an objective’. “It (inflation) will have to be stable for more than six months or so, then they could say they have reached objective,” said the fund manager.
The bank this week was confident inflation would reach objective in the second half of 2013. However, any substantial increase in administered prices such as power and electricity, as well as international oil prices may affect inflation going forward. An independent analyst said a steady inflation is projected, partly because of the strengthening of Pula against the Rand. Botswana imports most goods from South Africa. “When the Pula is strong imports are cheaper and imported inflation is also reduced,” said the analyst. At the close of markets on Wednesday, one Pula equalled R1, 17.