Botswana maintains rate, inflation seen staying in range

    Botswana's  central bank kept its Bank Rate unchanged at 5.50 percent, saying its "supportive monetary policy stance remains consistent with maintaining inflation within the 3 - 6 percent objective range" based on the current state of the economy and the domestic and foreign outlook.
     The Bank of Botswana (BB), which last cut its rate by 50 basis points in August 2016, added moderate domestic demand pressures and a modest rise in foreign prices contributed to a positive outlook for inflation, with downside risks from lower commodity prices and upside risks from higher administered prices and higher than expected commodity prices.
     Botswana's inflation rate eased to 3.4 percent in July from 3.5 percent in the previous two months while the exchange rate of its pula continued to slowly appreciate after hitting lows around 12 to the U.S. dollar in January 2016.
     The pula was trading at 10.2 to the dollar today, up almost 5 percent this year.
     Botswana's economy grew by 3.9 percent in the 12 months to March, up from a contraction of 1.8 percent in the same period that ended March 2016, BB said.
     After shrinking by 1.7 percent in 2015, Botswana's economy grew 4.3 percent last year as diamond sales rebounded and easy fiscal and monetary policies helped non-mining activities.
     In the first quarter of this year, Botswana's Gross Domestic Product grew by an annual 0.8 percent, down from 4.2 percent in the previous quarter.
      Higher economic activity is supported by the non-mining sector while the mining sector contracted by 10.3 percent in the year to March, BB said, adding non-mining output is projected to be below trend in the short to medium-term due to modest growth in household incomes and subdued economic expansion in trading partners.
     "However, gradual economic recovery is expected in the medium term in response to anticipated improvement in external economic conditions," BB said.
     Earlier this month the International Monetary Fund said Botswana's economy was undergoing a cyclical recovery with a broadly positive outlook, supported by a rebound in the global diamond market and public investment, and appropriate macroeconomic policies.
     "At present, the authorities' neutral monetary policy stance is appropriate as there does not seem to be room to lower interest rates," the IMF said, adding the exchange rate regime continued to serve the country well.
     The IMF forecast growth this year of 4.5 percent and 4.8 percent in 2018, with inflation seen averaging 3.7 percent this year and next year.


     The Bank of Botswana issued the following statement:
 

"At the meeting held on August 22, 2017, the Monetary Policy Committee of the Bank of Botswana decided to maintain the Bank Rate at 5.5 percent. The outlook for price stability remains positive as inflation is forecast to be low and close to the lower bound of the 3 – 6 percent objective range in the medium term. Meanwhile, inflation decreased modestly from 3.5 percent in June to 3.4 percent in July 2017.

Moderate domestic demand pressures and the modest increase in foreign prices contribute to the positive inflation outlook in the medium term. This outlook is subject to downside risks emanating from lower than projected growth in global economic activity and the resultant low commodity prices. Any substantial unanticipated increase in administered prices and government levies and/or taxes and any increase in international commodity prices beyond current forecasts present upside risks to the inflation outlook.

GDP in Botswana grew by 3.9 percent in the twelve months to March 2017, compared to a contraction of 1.8 percent in the corresponding period ending in March 2016. The improvement in growth reflects a 5.9 percent increase in non-mining activity, while mining sector output contracted by 10.3 percent in the twelve months to March 2017. It is projected that domestic non-mining output will be below trend in the short to medium term, constrained by continued modest growth of household incomes and subdued economic expansion in major trading partners. However, gradual economic recovery is expected in the medium term in response to anticipated improvement in external economic conditions. Annual increase in commercial bank credit was 4.1 percent in June 2017 compared to 7.5 percent in June 2016. Lending to businesses excluding parastatals grew at a higher annual rate of 9.5 percent in June 2017 compared to 7.5 percent in the corresponding period last year; household borrowing increased by 5 percent compared to 12 percent in the same period last year.

Global output is forecast to grow by 3.5 percent in 2017, compared to an estimated 3.2 percent in 2016, and by 3.6 percent in 2018, reflecting prospective improvement in performance in both advanced and emerging market economies. However, uncertainty surrounding global trade policy and openness, as well as moderation of growth in China, could adversely affect the medium-term growth prospects. Regionally, the projected weak economic performance in South Africa in 2017 could, potentially, undermine growth prospects in Botswana.

The current state of the economy and the outlook for both the domestic and external economic activity suggest that the prevailing supportive monetary policy stance remains consistent with maintaining inflation within the 3 – 6 percent objective range in the medium term.

Moreover, the potential for banks to expand credit provision continues to be supported by a stable financial system, and sufficient liquidity in the banking system. In particular, the level of Bank of Botswana Certificates and balances held by banks abroad, in part, represent excess liquidity, which is available for lending in response to any effective credit demand by both businesses and households.

The next MPC meeting is scheduled for October 24, 2017. "

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