Savers to bear brunt of interest rate cut
Isaac Pinielo | Friday August 19, 2016 15:44
Last week the central bank reduced its benchmark rate by 50 basis points from six percent to 5.5%, responding to low inflation and a slowing economic growth.
Chief investment officer at Afena Capital Botswana, Alphonse Ndzinge said net savers that depend mostly on short-term fixed deposits for income are probably the worst hit.
He explained that lower interest rates reduce the incentive to save and give a smaller return from saving. He added that the lower incentive to save will encourage consumers to spend rather than hold onto money.
“Lower interest rates is bad news for savers. For example, retired people may live on their savings and if interest rates fall, they (pensioners) have lower disposable income and so will probably spend less. Lower interest rates will actually reduce the income of savers,” said Ndzinge.
He further stated that with interest rates at historic lows, the room for a further rate cut seems limited, adding that if the current state of the domestic economy continued to worsen in this low inflationary environment, there could be further rate cuts on the cards.
Ndzinge further stated that by reducing the benchmark rate by 0.5%, BoB is aiming to boost consumer spending and business investment by providing cheaper access to capital.
He said the rate cut means different things to different segments of the market, adding that as one would expect, borrowers and investors in long-term bond funds are delighted by lower borrowing costs. Research analysts at Motswedi Securities, Garry Juma and Moemedi Mosele jointly asserted that the bank rate cut is another hard pill to swallow for local banks. In a brief analysis of the bank rate cut, the analysts said the cut in the bank rate will reduce banks interest margins further, noting that since the central bank eased its monetary policy, local banks interest income and profitability has been falling.
Last year, all listed commercial banks released ‘profit warning statements’ due to the decline in profitability.
First National Bank of Botswana (FNBB), which is the country’s largest bank in terms of market capitalisation, has already issued a fresh profit warning statement ahead of the release of its full-year financial results for the year ended June 30, 2016.
“Deposits might also decline as investors will be discouraged to save due to the lower returns,” they said.
Mortgages holders however have a reason to smile since their monthly repayments will certainly reduce.
According to the analysts, the cut in the bank rate was always expected given the slow growth of the domestic economy. The only uncertainty was on the timing of the cut. The last interest rate cut was made almost a year ago.