The Bank of Botswana (BoB) has underscored the primary aim of monetary policy in stimulating economic growth, confident that such support can attract capital inflows into the economy.
BoB revealed that the Monetary Policy Committee (MPC) carefully considers the risks of capital flight when deciding on policy rates, mindful what others are doing also.
The bank lowered the Monetary Policy Rate (MoPR) by 25 basis points, from 2.4% to 2.15%, during its June meeting. The decision was based on the MPC’s assessment low inflation profiles and balanced risks. But officials revealed during an economic briefing that it factored in low risk of capital flight as it continued a trend that began with a rate cut last December.
They disclosed that their assessment involves closely comparing what other markets do to understand the possibility of capital moving out of the country.
“That assessment is done and its one of the factors considered when we make such a determination,” Innocent Molalapata, the Director of Research and Financial Stability Department at the bank said. “Basically then it says currently we did not anticipate more capital moving out.”
Around the world, most central banks are leaning towards lowering interest rates reflecting inflation expectations. Global inflation is projected to drop to 5.9% this year from 6.8% in 2023, and further decrease to 4.5% by 2025.
“The trend is for inflation to go down and we would expect central banks to tilt towards cutting rates to support growth,” Lesego Moseki Director of Financial Markets at the BoB said.
“The difference is the rate that they will cut; the speed and the quantum,” Moseki said.
Botswana generally has a lower interest rate environment, which is one of the reasons economists cautions about capital flight. Regionally, Bank of Zambia (BoZ) hiked the Monetary Policy Rate (MPR) by 100 basis points – taking the policy rate from 12.5% to 13.5%. It was the sixth successive policy rate hike by the BoZ. Bank of Namibia MPC maintained repo rate at 7.75% at its last meeting. South African Reserve Bank (SARB) kept the repo rate unchanged at 8.25%. Experts says Lesotho and eSwatini will follow SA and Namibia since they’re Common Monetary Area (CMA) countries — unless their reserves positions change materially, which is unlikely.
The Fed held its interest rate and is likely to wait to make sure inflation is really contained before considering a cut.
Local economists expected the BoB to hold before cutting the policy rate given that they had expected inflation to go back to the range in 3Q but that happened a lot sooner. The expectation was that the new forecast should point to inflation averaging within the range over their forecast horizon. This led to suggestions that there might be other motivating factors influencing BoB’s decision which include low risk of capital flight.
BoB said three factors guided the central bank’s decision to cut the policy rate at its June meeting. The MPC examined medium-term inflation trends and compared them to their April projections, leading to a downward revision in their forecasts.
“We expect inflation to be lower in the medium term as compared to what we had indicated in April,” Molalapata said adding “that on its own says going forward we expect inflation to remain low”.
The MPC also considered business expectations regarding inflation, who anticipate inflation to remain within the central bank’s target range of 3-6%. This suggests that inflation expectations are stable, which is a crucial factor influencing the decision.
Another important factor was the assessment of inflation risks. The bank expected the risks to lean more towards higher inflation at its April meeting. However, by the June meeting, they found that the risks were more evenly balanced.
Based on a better inflation outlook and more balanced risks, the decision was made to lower the policy rate.
“The main aim of the monetary policy is to support growth and if it is supportive of growth, you may see funds flowing into the economy,” Moseki said. “If you are able to finance investment spending and be able to produce goods that are very competitive through other policies and including policy rate, that would be good for the Botswana economy.”
Central Bank is aware that there could be some movement of funds due to yield differences elsewhere. However, they are confident that Botswana’s strong ratings from international agencies make it an attractive place for investments.
BoB highlighted that political stability attracts investors anchored by financial and banking stability. The bank also underscored that Botswana maintains a stable exchange rate without overvaluation, which helps prevent currency devaluation and potential investor loss which all make capital flight unlikely.
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