BoB adopts rate policy reforms

• Moves to contain raging inflation
• Hikes monetary policy rate  
• Expects inflation to slow down in 2023

BAKANG TIRO

editors@thepatriot.co.bw

The central bank, Bank of Botswana (BoB), has introduced monetary policy reforms that are aimed at taming the skyrocketing inflation which is expected to revert within objective range in 2023.

The bank had previously projected that inflation, which is currently at 10%, will revert to the bank’s medium term objective range of 3-6% in the third quarter of 2022 but it has revised that to Q1 of 2022.

Briefing the media on the outcomes of the bank’s Monetary Policy Committee Meeting (MPC) on Thursday, Governor of BoB, Moses Pelaelo, said the new monetary reforms are meant to controls inflation.

He said the MPC decided to increase the Monetary Policy Rate (MoPR) by 51 basis points from the prevailing 1.14 % yield on the 7-day Bank of Botswana of Botswana Certificate to 1.65%.

Pelaelo  said  the MPC decided that the repo and reverse repo rates to be conducted at the MoPR of 1.65 percent; the Standing Deposit Facility (SDF) Rate be set at 0.65% (100 basis points below the MoPR); and the Standing Credit Facility (SCF) Rate be set at 2.65 % (100 basis points above MoPR).

According to Pelaelo, the monetary policy will improve business environment and cut inflation.

“The monetary policy reforms made will enhance potency of the bank rate. The Bank of Botswana Certificates are auctioned weekly and it is one of the instruments that is used to anchor policy rate. Also commercial banks will manage liquidity. The bank is on course to cut down inflation. We expect the inflation rate for April 2022 to be a single digit and in Q1 2023 it will be within objective range,” he said.

He noted that the latest decline in inflation from 10.6% in February 2022 to10% in March was inspiring though still above the bank’s medium term objective range of 3-6%.

“The latest decline in inflation mainly reflects the base effects that are associated with the upward adjustment in domestic fuel prices in the corresponding period in 2021.The current high level of inflation is mainly driven by supply-side factors which contribute about 7 percentage points to the prevailing inflation (March 2022),” said Pelaelo.

In addition Pelaelo said the central bank through the reforms will make them contribute to macroeconomic stability locally, saying without it is like just the body without oxygen to support it.

Deputy Governor Dr Alex Kganetsano said the effected changes will be key for prices stability.

He indicated that the effected reforms will allow better policy formulation to control inflation.

“We have seen the prices of cooking oil skyrocketing from P34.00 to over P80.00. The central bank has engaged extensively with the International Monetary Fund (IMF) for a couple of years on the reforms as they were formulated. The inflation is cost driven and the sources of it are supply based factors and therefore it is important to control it so as to stabilise prices to cushion consumers,” he stressed.

Head of Research and Financial Stability Department at BoB Dr Lesedi Senatla described the factors that are pushing inflation such as Botswana Housing Corporation (BHC) rental hikes, the increase in fuel prices and the increase of Value Added Tax (VAT) all effected in April 2021 as transitioning factors. As a result, he said businesses expect inflation to be at 8.5% at end of 2022 and 7.5% during Q1 2022.

Russia- Ukraine cold

The build-up of the aggregate demand, global supply disruptions, and the plunge of the local currencies and high prices of commodities globally could keep up the pressure on inflation globally.

The Russia and Ukraine war is expected to push up costs of key commodities such as fuel. Pelaelo said Botswana is also not exempt from the impacts of the war just like other economies.

He  said there is significant risk that inflation could remain elevated due to factors that include: the potential increase in international commodity prices beyond current forecasts; persistence of supply and logistical constraints due to lags in production; the economic and price effects of the ongoing Russia-Ukraine conflict; and uncertainCOVID-19 profile.