Central Bank Hikes interest rates

Central Bank Hikes interest rates



THE Central Bank of Lesotho (CBL) this week increased its interest rate by 25 basis points from 6.75 percent to 7 percent, a move likely to force commercial banks to increase their lending rates. Known as the CBL Rate, the interest rate is used by commercial banks to borrow from the central as a lender of last resort. Commercial banks take cue for the CBL Rate when determining their interest rates housing, credit card, car, business and personal loans. Therefore when the central bank increases its rate customers must brace themselves to pay more on their loans. The increase comes barely two months after the central bank revised the rate by 50 basis points from 6.25 to 6.75. That the reviews are so close could be an indication that the central bank’s monetary policy committee realises its initial increase was not adequate or the economic outlook has so dramatically changed there is need for an urgent intervention.  A statement released after the Tuesday’s Monetary Policy Committee meeting said the increase was based on global economic and financial markets developments.CBL said domestic economic conditions and outlook, as well as the Net International Reserves position, were also considered.

Central Bank of Lesotho Governor Retselisitsoe Matlanyane

On the global market the bank said economic activity remained subdued, with the United States economic, the world’s largest economy, slowing down in the last quarter of last year. The statement said although the global economy is expected to bounce back the growth will still remain below potential. China, the biggest of raw materials which have sustained African economies, has also slowed down after years of consistent double digit growth. China’s slow growth has hit South Africa whose economy is based on raw materials and is intricately linked to that of Lesotho.  Coupled with the low demand for its products is investor’s confidence in South Africa has taken a knock, thanks to policy blunders. Spooked by the government’s policy flop-flop investors have pulled their monies out of South Africa, triggering a sharp drop in the value of the rand.

The central bank also cited the neighbouring South African economy slowing down with an annualised growth rate of 0.6 percent during the fourth quarter of 2015.

“Domestic output growth outlook reflects a further slowdown in 2015. Real GDP growth is projected to have decelerated to 2.8 percent in 2015 compared with 3.6 percent in 2014,” it reads.

The CBL said domestic inflationary pressures are building up with the year-on-year customer inflation rate rising from 5.1 percent in December 2015 to 5.8 percent in January 2016.

“This is attributable to increasing food prices due to weaker exchange rate and the effects of the drought,” the statement reads.

“In terms of the outlook, inflation is expected to continue on an upward trajectory in 2016.”

The statement says the broad measure of money supply (M2) expanded by 0.1 percent during the fourth quarter.

“This was caused by a decline in domestic claims and a slow growth in Net Foreign Assets. Money market interest rates remained broadly aligned to their regional counterparts.”

“Having considered the above economic developments and outlook, the Committee decided to maintain the NIR target floor of US$600 million and increase the CBL rate by 25 basis point.

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