The Bank of Botswana governor, Cornelius Dekop, has clarified that although banks increasing prime lending rates during an "accommodative monetary policy stance" might be "morally untoward", they are still in line with prevailing prudential and regulatory requirements.
Dekop was speaking at the recent Monetary Policy Committee (MPC) media engagement on Friday, where the Monetary Policy Rate (MoPR) was kept at 1.9%.
Although the central bank has kept the MoPR at 1.9% since August 2024, several commercial banks in Botswana have recently increased their prime lending rates, citing a prevailing "liquidity squeeze." This follows the central bank's April 2023 decision to allow individual banks to independently determine their own rates.
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| Prime lending rates are on the rise in Botswana |
When liberalising prime lending rates in 2023, the bank put out guidelines which stated that lending rate decisions had to reflect market competitiveness, reasonableness and no collusion among banks. So far, the banks are abiding by all those, according to Dekop.
In addition to keeping the MoPR steady, the Bank of Botswana has also taken several measures to assist banks with short-term liquidity, including reducing the primary reserve requirement from 2.5% to 0% and extending the maturity of repos from overnight to seven days and then 30 days.
The Bank of Botswana also raised the threshold for trading of foreign exchange from $1 million to $5 million while also increasing the foreign currency trading margins between itself and commercial banks from +/- 0.125% to +/- 0.5%. The standing credit facility has also been kept at 2.9% to enable banks further access to their liquidity needs at their own discretion.
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| Commercial banks' liquid assets have declined significantly in the last few months |
"Evidently, there is a need to augment these initiatives given the persistence of the liquidity constraints and adverse outcomes such as an increase in prime lending rates by commercial banks that is misaligned with the monetary policy stance and economic fundamentals," Dekop said.
To manage the prime lending rate hikes, the bank has ruled out enforcing foreign exchange controls to force banks to repatriate their foreign currency holdings or using the MoPR to urge banks to reduce their lending rates. The bank will instead continue to focus on dialogue with banks and monitoring the impact of current liquidity tools.
"Although the banks are currently in favour of repatriating their foreign exchange holdings to cushion the liquidity squeeze, they want to do so in a way that places the risk and burden of cost on the Bank of Botswana, something we are against," added Bank of Botswana deputy governor Lesego Moseki.