Interest rates represent the cost of borrowing money, expressed as a percentage of the amount borrowed. An interest rate is the phrase used to define the additional amount that a person or corporation borrowing money must return in addition to the principal.
The BoB, as the country’s central bank, determines the primary interest rates in capital markets through adjustments to the Monetary Policy Rate (MoPR), based mainly on the outlook for inflation. Last December, the central bank trimmed interest rates by 25 basis points, the first cut since April 2020.
Last week, while speaking on Botswana`s economic outlook for the year, Absa macroeconomist for Southern Africa, Ridle Markus, said Botswana`s dependence on diamonds makes it susceptible to a vast number of shocks, a situation which will make interest rates cut impossible this year.
“Value chain disruptions, geopolitical tensions and climate change issues will work hand in hand to make things very hard for Botswana’s economy. “We predict that these risks will not make room for the consideration of interest rate cuts this year,” he said.
The BoB’s Monetary Policy Committee (MPC) hinted in its final meeting last year that it was unlikely to lean towards more rate cuts despite inflation cooling and falling to within the central bank’s target range. The MPC, which sets interest rates, said while inflation was stable, upward risks possible adjustment in prices controlled by government such as electricity and water tariffs as well as any increases in domestic food prices due to the projected El Niño conditions in Southern Africa.
The central bank raised interest rates three times in 2022 by a collective 151 basis points as it fought soaring inflation which peaked at 14-year highs in August. However, since then, inflation has been falling – largely due to the dissipating effects of fuel price increases from 2022 which had weighed heavily on consumer price index calculations.
Markus further pointed that the absence of interest rate cuts was not necessarily a bad thing as Botswana’s rates are among the lowest in Africa compared to nations like Nigeria which stand at above 11%.
“Botswana is very lucky to have its interest rates where they are looking at the diamond downturn and oil price risks it has endured in past quarters. “When you look at nations from the central Africa region, interest rates track above 11%, which means Botswana is still in the green” he said
Interest rates provide important signals about the direction of the economy and future growth trends. Adjustments to rates by central banks, like lowering or raising the policy rate, aim to influence borrowing behaviour and stimulate the overall economic activity.
