Bank of Botswana Maintains Rate at 2.65% Despite Falling Inflation

The Bank of Botswana's Monetary Policy Committee (MPC) has announced that it will maintain the bank Monetary Policy Rate (MoPR) at 2.65% despite headline inflation decreasing significantly. Inflation fell from 4.6% in June to 1.5% in July 2023, breaching the lower bound of the Bank’s medium-term objective range of 3%– 6%. 

The monetary policy rate is a short-term, often overnight, rate that banks charge one another to borrow funds. When inflation (the rate at which prices for goods and services rise) is above the central bank's targets, the bank raises the policy rate to slow down the economy. This happens because raising the policy rate will increase the cost of borrowing as loans would now come with higher interest rates. According to the economic theory of supply and demand, if borrowing money becomes more expensive, consumer demand will fall, bringing down prices with it along the way. 

According to Bank of Botswana, the country's inflation is forecast at 1.2% for August 2023 and the MPC projects that inflation will remain below the lower bound of the objective range temporarily and revert to within the objective range from the first quarter of 2024 into the medium term. The bank credits the tamed inflation to, among others, among others, subdued domestic demand and the downward revision in recent forecasts of international food prices and trading partner countries' inflation.

The MPC also noted the growth-enhancing economic transformation reforms and supportive macroeconomic policies being implemented. These include accommodative monetary conditions, improvement in water and electricity supply, implementation of the Economic Recovery and Transformation Plan and the two-year Transitional National Development Plan, as well as reforms to further improve the business environment (the bank cited the promulgation of the Credit Information Act and Movable Property Act both of which have the potential to make credit more accessible). In addition, the recent announcement of the agreement in principle between the Government of Botswana and De Beers Group on a new Debswana Mining Licence and new Sales Agreement is expected to be positive for medium-term growth.

"The MPC recognises that, in addition to the dissipating impact of increases in administered prices in 2022, the economy is expected to operate below full capacity in the short term and, therefore, not generate demand-driven inflationary pressures. However, inflation is forecast to be within the objective range in the medium term and closer to the upper bound. Therefore, the MPC decided to maintain the MoPR at 2.65%," the bank said in a statement.

The MPC has two more sittings left in 2023, one on October 26 and the last one on December 7, where the country's economic observers will wait to see what decisions it takes with regard to the rates going into 2023.

The MPC, chaired by the Governor, is a statutory committee established by the Bank of Botswana (Amendment) Act, 2022. The Committee consists of nine members, four of whom are independent external members.

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