Botswana’s high interest rates are making investors smile, but when will the music stop? In this last instalment of Investing in a High-Yield Environment, the Bank of Botswana said it is working to bring rates back under control, which could push them down. Exactly when that will happen, however, remains uncertain.
While pension funds are currently enjoying higher returns thanks to the liquidity squeeze, asset managers agree that this is not sustainable. At the recent Bifm Breakfast Seminar, CEO Ms Clair Mathe-Lisenda directed some tough questions to the central bank representative:
- How long can the market sustain this?
- When is the cycle likely to end?
- And when is the music going to stop?
Her concerns came right after economist Dr Keith Jefferis explained that interest rates are now being pushed up by fiscal dominance, government borrowing needs, rather than by the central bank’s monetary policy, which is supposed to anchor the system.
Responding to her questions, Bank of Botswana Senior Dealer, Mr Boago Kebaitse, was clear:
“The intention is to make the music stop as soon as possible because this is not good for the economy.”
He added:
“We are trying to have an accommodative stance… to reduce interest rates as much as possible because you want to be able to extend credit at the lowest possible rates.”
Interest Rates Detached From Policy Rates
Dr Jefferis pointed out that in recent months, interest rates in both the banking system and the capital market have started to drift away from the Bank of Botswana’s Monetary Policy Rate (MoPR).
The rates that actually matter to borrowers and investors are no longer moving in line with the central bank’s signal.
That widening gap, the spread, is another sign of fiscal pressure overpowering monetary policy.
Dr Jefferis highlighted three key interest rates that matter in Botswana’s financial system:
- Commercial bank prime lending rates – These sit between 7% and 8%, and banks set them independently. Over the past six months, they’ve used that flexibility aggressively.
- Long-term government bond rates – The 10-year bond is around 11%.
- The Monetary Policy Rate (MoPR) – Set by the Bank of Botswana and is supposed to be an anchor.
Recently, the MoPR was raised from 1.9% to 3.5% in October, in an attempt to close the gap between the central bank’s policy rate and the much higher market rates.
Monetary Policy Transmission Mechanism Is Broken
In his Q3 2025 report, Dr Jefferis didn’t mince words:
“The monetary policy transmission mechanism is broken, and monetary policy is ineffective.”
He explained that even though the MoPR was low and steady for months, interest rates across the economy kept climbing anyway.
The reason?
Fiscal dominance: government’s heavy domestic borrowing is pushing up rates in both the capital market and the banking system, no matter what the central bank wants.
So the BoB has lost control of this policy lever,”
he wrote.
The October MoPR increase, up 1.6 percentage points, was meant to “recalibrate” the system and reconnect policy with market rates. At the same time, the central bank instructed commercial banks not to raise their prime lending rates any further.
Before this adjustment, Mr Kebaitse had already told the Bifm Seminar audience that the central bank was looking for ways to pull rates down:
- through moral suasion (persuading banks),
- through regulatory pressure to cap interest rates, and
- by injecting liquidity into the banking system to ease the funding squeeze.
Are liquidity issues as bad as they seem?
Dr Jefferis noted that, despite the constant talk of a liquidity shortage, the hard data tells a different story:
- Bank credit grew 9.6% in the year to July,
- Liquidity levels remain stable, and
- There’s been no increase in loan arrears.
So while there is plenty of concern and anecdotal evidence about tightening conditions, the numbers show a system that is still holding up, for now.
What Dr Jefferis suggests is that after last year’s severe liquidity crunch, banks were forced to offer very high interest rates, as high as 15% to 20%, on wholesale fixed deposits. These are deposits from big players like pension funds and insurance companies. Banks use this money to lend it out.
Those high rates worked, Dr Jefferis believes.
They pulled money back into the banking system, giving banks the cash they needed to start lending again, though at a much higher cost, he said.
Even so, Ms King believes the liquidity picture is still uncertain.
Are High Deposit Rates The “New Normal”?
She explained that things are too fluid to know whether today’s high deposit rates are the “new normal” or just a temporary spike. Responding to Ms Mathe-Lesinda’s earlier question about how long this cycle might last, she said:
“The situation is still quite fluid at the moment to really determine when it’s going to end, if it’s going to end.”
She added that they are hoping the various measures aimed at injecting liquidity into the market will eventually ease the pressure:
“We do anticipate and hope that some of these liquidity-injecting measures can still come to play and alleviate some of the pressures we’re having.”
