Business

BoB hands Christmas gift to borrowers

Mbongeni Mguni - Lewanika Timothy | Monday December 18, 2023 06:00

No relief: Inflation has dropped from its double digit highs last year to 3.1 percent but most of the fall has been due to fuel prices. Food prices remain stubborn and within that category, a wide range of items have been escalating quickly but quietly PIC: MORERI SEJAKGOMO
 
No relief: Inflation has dropped from its double digit highs last year to 3.1 percent but most of the fall has been due to fuel prices. Food prices remain stubborn and within that category, a wide range of items have been escalating quickly but quietly PIC: MORERI SEJAKGOMO



The central bank last week shaved interest rates by 25 basis points from 2.65 to 2.4 percent, a move that means borrowers on variable rate loans such as personal and credit card loans, will enjoy a decrease in their repayments. Consumers intending to take up new loans will also enjoy the new lower interest rates.

The reduction in interest rates follows an updated BoB inflation forecast which shows lower than previously expected prices in the economy going forward. The central bank now expects inflation to average 4.9 percent this year, from its October forecast of 5.2 percent, providing scope to ease borrowing costs and support economic activity.

“The Monetary Policy Committee projects the economy to operate below full capacity in the short term and, thus, not generate demand-driven inflationary pressures,” new BoB governor, Cornelius Dekop, told journalists at a briefing last week. “The current state of the economy and the outlook for both domestic and external economic activity provide scope to ease monetary policy.”

Analysts told BusinessWeek that through the rate cut, Dekop and the Monetary Policy Committee were signalling that the BoB’s monetary policy posture remains 'accommodative' meaning the central bank would look for opportunities to support economic growth when inflation is benign.

Dekop, who is the first governor selected from the fiscal policy side of the coin since the late Baledzi Gaolathe 23 years ago, said inflation is expected to remain within the three to six percent objective range going into the medium term.

Deputy governor, Tshokologo Alex Kganetsano told media that the rate cut was designed to support activity in the economy.

“We want to stimulate economic activity and we have taken the view that past inflation was because of administered prices and the output gap is negative. “The 151 basis point increase that was done last year has had an impact on credit growth which has decelerated. “We continue to monitor the situation and should there be a need for the Bank to tighten rates, we will do so,” he said.

Meanwhile, local banks have passed on the rate cut to their customers, slashing the prime lending rate to 6.51 percent. The prime rate is the interest rate banks give to their best customers and it is used as a benchmark for all other credit products within the market. Since April last year, commercial banks have had the statutory freedom to set their lending rates, independent of the central bank, a move the BoB said was designed to boost market competition and fair pricing of credit.

Despite the freer environment since last April, banks have stuck to the BoB’s prompting in terms of their prime rates. However, rates for products such as vehicle and personal loans, credit cards and others differ amongst the banks.

Dekop told BusinessWeek that while banks had the freedom to set their own rates, the central bank expected that its moves on interest rates would reverberate in the financial market.

“The Monetary Policy Committee has decided on rates and the expectation is that there should be a reaction from the banks,” he said. “The policy change means that banks determine their prime rate. Each bank can respond to that when they make business decisions, perhaps offering facilities below or above, and competing on that. “The good thing is that the new policy gives banks the power to decide and compete amongst themselves.”