Linah K Mohohlo: Botswana's Monetary Policy Statement for 2014
Remarks by Ms Linah K Mohohlo, Governor of the Bank of Botswana, at the launch of the
Monetary Policy Statement for 2014, Gaborone, 28 February 2014.
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I wish to welcome you to the launch of the Monetary Policy Statement for 2014, which is by
now well-known to be the premier event for the Bank. The Statement informs stakeholders
how one of the Bank's key functions is discharged, and that is the formulation and
implementation of monetary policy. The Statement is issued each year because the Bank
attaches importance to the need for transparency and accountability in the discharge of this
key mandate. That is why your dedicated patronage on this occasion is sincerely valued and
appreciated.
As has been regularly explained, the principal objective of monetary policy is to achieve
sustainable, low and predictable level of inflation and, at the same time, ensuring that the
economy is financially stable. This is due to the fact that sustainably low inflation and a
conducive financial environment support economic growth by fostering savings and
productive investment, while promoting the competitiveness of domestic producers and
contributing towards a more equitable income distribution.
This is the seventeenth year since the Bank has issued the annual Monetary Policy
Statement; and perhaps this year's Statement is of particular interest. It is the first time that
the launch takes place in circumstances in which inflation has been comfortably within the
Bank's medium-term objective range for a sustained period. This outcome has afforded the
Bank the scope to ease monetary policy in the course of 2013. I will have more to say about
this shortly.
While this is, without a doubt, a positive development, it does not suggest a time for
complacency with respect to the Bank's approach to monetary policy. On the contrary, the
early weeks of 2014 have reminded us of the considerable uncertainty that continues to
surround prospects for the global economy, and the vulnerability of emerging markets to
related risks is turning out to be particularly acute. Therefore, the vigilance of the Bank,
through the work of the Monetary Policy Committee and supporting structures remains
undiminished.
As I intimated earlier, one of the core functions of the Bank is conducting monetary policy.
Indeed, the framework through which the Bank carries out this function is now
widelyknown; you can bear testimony to the fact that any adjustment to policy is communicated to
the public immediately after each meeting of the Monetary Policy Committee. The policy
framework is forecast-based, with a medium-term outlook that primarily guides the Bank's
response to anticipated movements in inflation, while taking account of prospects for
economic growth.
Central to the forecast is an assessment of the prevailing gap between long-term trend
output and actual output as a leading indicator of inflation. It is recognised that other factors
also contribute to inflation. These other factors include foreign inflation, exchange rate
movements, changes in domestic administered prices and taxes, as well as expectations of
future price movements.
Therefore, it is essential that policy credibility is underpinned by rigorous analysis of
economic and financial developments, and by an assessment of future trends and
associated risks, with a focus on anticipated price changes and their implications for the
medium-term inflation outlook. There is also a consideration of relevant indicators of financial
stability in the domestic economy. All these considerations will form the basis for the
formulation and implementation of monetary policy in 2014.
Distinguished Ladies and Gentlemen:
I now wish to highlight inflation trends and other economic developments of the past
year. You may recall that global output growth slowed marginally in 2013, from 3.1 percent in
2012 to an estimated 3 percent, resulting in modest inflationary pressures, as capacity
utilisation and high unemployment in major economies persisted. With respect to
commodities, international oil prices were stable because of the emergence of new sources
of supply and the easing of geopolitical tensions in some oil producing regions. The increase
in food prices was also restrained due to ample grain production. Consequently, global
inflation decreased from 4 percent in 2012 to 3.8 percent in 2013.
Average inflation for Botswana's trading partner countries declined from 4 percent in 2012 to
3.4 percent last year. The countries the currencies of which comprise the Special Drawing
Rights (that is, the United States of America, Eurozone, Japan and the United Kingdom) also
experienced a decline in inflation, from an average of 1.9 percent to 1.3 percent in the same
period, mostly due to weak economic activity, lower food inflation and the moderation in
international oil prices. Price movements in South Africa followed the same trend; they
slowed down from 5.7 percent in 2012 to 5.4 percent in 2013, in this way, remaining within
the medium-term target range of 3-6 percent.
In Botswana, inflation maintained a downward trend too, moving within the Bank's
mediumterm objective range by June 2013. By the end of the year, inflation had declined to
4.1 percent, compared to 7.4 percent in December 2012.
In the event, price increases were subdued across a broad range of goods and services,
including food. In fact, commodity groups representing about 90 percent of goods and
services in the Consumer Price Index basket were within the objective range. Overall,
inflation excluding administered prices decreased from 6.8 percent in December 2012 to
4.7 percent in December 2013, while the 16 percent trimmed mean measure of core inflation
fell from 7.1 percent to 4 percent.
The sustained decline in inflation was due to a dissipation of the impact of the increase in
administered prices effected in 2012. The moderate increase in prices was also indicative of
benign domestic demand pressures. The impact of government spending on economic
activity was small in the context of fiscal consolidation measures, with annual government
expenditure growth limited to only 2 percent.
To some extent, demand was supported by continued growth in commercial bank credit,
especially to households, which went up at a faster rate, from 21 percent in December 2012
to 24.2 percent by the end of 2013. It was observed that growth in household credit was led
by mortgage lending, which grew by 43.3 percent. The continued rapid expansion in
household credit also reflected, in part, some improvements in financial services provision
and financial inclusion. Nevertheless, the level of household debt, which is dominated by
personal loans, in an environment of slow growth in incomes, is a cause for concern. While
current indicators, such as low default ratios, suggest that widespread default risks are not
imminent, the related emerging debt repayment burden for households warrants close
attention.
In contrast, there was a marked deceleration in the growth of business credit, from
26.8 percent in December 2012 to only 4.6 percent in December 2013. The slowdown in the
growth of business credit is reflected in virtually all economic sectors, and is in line with the
moderation of growth in economic activity. For instance, the annual growth in non-mining
GDP slowed to 5.1 percent in the twelve months to September 2013, compared to 8 percent
a year earlier.
Honoured Guests:
Implementation of monetary policy in the past year posed an interesting challenge. From
a global perspective, there was sluggish demand, weak economic activity, lacklustre financial
intermediation and benign inflationary pressures. All the same, there was positive sentiment
flowing from faster output growth and decreasing unemployment rates in the United States of
America and United Kingdom; the euro area too emerged from recession. Output expansion
in emerging market economies remained robust and spurred global economic performance.
Monetary policy in major economies carried the burden of supporting economic recovery as
fiscal austerity programmes remained in place. It was mostly accommodative and involved
maintenance and, in some instances, reduction of the already low policy interest rates. Some
of the major central banks used forward guidance to indicate thresholds for unemployment
and growth; this was adopted with a view to guiding market interest rates in the medium term
and to foster investment and demand. In contrast, the more imminent threat of rising inflation
in emerging market economies resulted in some policy tightening.
Here at home, monetary policy was conducted principally through open market operations to
absorb excess liquidity from the banking system and maintain market interest rates at
required levels. The Monetary Policy Committee continued to assess the impact of economic
and financial developments on inflation prospects. The effect of credit growth on the quality
of banks' assets, the growing burden of household debt and the potential for asset price
bubbles were also kept under review. The result was the reduction of the Bank Rate by a
cumulative 2 percentage points to 7.5 percent during the year, against the background of,
among others, below-trend GDP growth and a positive outlook for inflation in the medium
term. Accordingly, commercial banks reduced their prime lending interest rates by the same
magnitude to 9 percent, with corresponding movements in most other market interest rates.
As a related matter, and in a bid to reward depositors, commercial banks have been advised
to publish and offer to customers their 91-day deposit products. These products pay an
interest rate that is, at a minimum, 3.5 percentage points below the Bank Rate. Longer dated
deposits are expected to attract commensurately higher interest rates.
In terms of the outlook for inflation, the global economy is projected to grow by 3.7 percent
in 2014. This compares with the estimated growth of 3 percent for 2013. The recent upward
revision to the forecast reflects improving sentiment for global economic prospects. There
are some risks to the forecast, however, which relate to a potential reversal of capital flows
that could follow the ongoing wind-down of asset purchases in the United States of America.
This could undermine growth prospects for emerging market economies, which have been a
major source of global economic growth.
Global inflation is projected to maintain the 2013 level of 3.8 percent. This is against the
background of stable commodity prices, subdued output growth and persistence of spare
capacity, as well as high unemployment rates in major economies. There may, however, be
upward pressure on inflation in some emerging market economies, given robust economic
activity and lower unemployment rates.
Monetary policy in major economies is expected to focus on maintaining an accommodative
stance, providing liquidity and fostering resilience of the financial sector. In contrast,
emerging economies are likely to have a bias towards policy tightening, in response to
emerging global risks of capital outflows to industrialised economies, and the need to focus
on structural weaknesses of their respective domestic economies.
The domestic economy is forecast to grow by 5.1 percent in 2014, compared to last year's
GDP growth of 5.4 percent. Demand will be supported by the growth in government
expenditure, for which budgetary allocations for the 2014/15 fiscal year have increased by
8.5 percent, with the bulk of the additional spending concentrated in the recurrent budget.
Business confidence remains muted, but the recent successful transfer of diamond
aggregation and sales functions from the De Beers London office to Botswana should serve
to boost domestic economic activity.
On the exchange rate front, I wish to submit that the crawling band exchange rate policy has
continued to serve the purpose for which it was established, which is to render domestic
industries internationally competitive and contribute towards macroeconomic stability and
economic diversification. You will, by now, know that the parameters of the exchange rate
policy were recently made public by the Honourable Minister of Finance and Development
Planning. Indeed for 2014, the Pula basket weights are 55 percent for the South African rand
and 45 percent for the Special Drawing Rights. The Pula will crawl downward by
0.16 percent, given that the inflation objective range of 3-6 percent is marginally higher than
the projected average inflation range of trading partner countries of 3-4 percent.
Overall, it is expected that pressure on inflation from domestic demand will be low in 2014,
as will the impact of foreign price developments. Therefore, inflation is projected to remain
within the medium-term objective range of 3-6 percent. This means there will be further
scope for monetary policy to support economic activity through the current accommodative
policy stance, while maintaining price stability. As usual, the Bank will respond appropriately
to any sustained deviation of the inflation forecast from the objective range and to any
emerging threat to financial stability, where the causal factors can be influenced by monetary
policy action. Be that as it may, any upward adjustment in administered prices and
government levies or any increase in international food and oil prices beyond current
forecasts will present upside risks to the inflation outlook. Furthermore, any substantial civil
service wage increase could also generate inflationary pressures through higher demand
and inflation expectations.
Distinguished Ladies and Gentlemen:
I conclude by reiterating that the domestic economy is expected to be characterised by an
environment of benign inflationary developments in 2014. The Bank's formulation and
implementation of monetary policy will focus on entrenching expectations of low and
sustainable inflation in the medium term, through timely responses to price developments,
while ensuring that credit and other market developments are consistent with lasting financial
stability.
I thank you for your attention.
Copies of the detailed Monetary Policy Statement are in the foyer of the Auditorium; please
obtain a copy so you can read it at your leisure.