THE Central Bank of Lesotho (CBL) has increased its interest rate to 7.00 percent from 6.75 percent, in a move meant to achieve macro-economic stability in the country.
However, this is likely to cause ripple effects in the various sectors of the economy, with some financial experts hinting this was going to trigger an increase in the cost of borrowing money, as commercial banks will pass-on the costs to the clients.
Announcing the adjustment on Tuesday this week, following the Banks’s Monetary Policy Committee sitting, CBL Governor, Retšelisitsoe Matlanyane, also revealed the Net International Reserves (NIR) target floor has been increased from US$745 million to US$770 million.
The Monetary Policy Committee regularly sits to determine monetary targets to ensure macro-economic stability in the country.
However, the CBL rate is applied when the central bank lends money to commercial banks. Therefore, the increase in the CBL rate, among other factors, is expected to raise loan interest rates as the banks will pass on the cost to consumers through adjusting their prime lending rates by at least 25 basis points.
According to an economic expert and former Minister of Finance, Timothy Thahane, the impact of this can be seen in the reduction in the amount of lending done by banks to consumers, as this was likely to contain inflation by discouraging borrowing by consumers.
On the other hand, Dr Thahane indicated that the upward adjustment of the CBL interest rate could be good omen for consumers of government bonds since the interest rates at which the bonds are issued will offer better returns.
The South Africa repo rate, on which the CBL rate is normally aligned, has been left unchanged at 6.75 percent.
Meanwhile, Dr Matlanyane further indicated that based on the projected figures, economic growth was expected to remain modest in 2017, supported by the mining and service sectors.
“In the medium-term, growth is expected to accelerate, anchored by mining and construction,” she said.
Dr Matlanyane however noted that the downside risk to the outlook include the subdued growth prospects of South Africa’s economy, and pressure on the domestic fiscal position.
She further indicated that the year-on-year consumer inflation rate was measured at 5.7 percent in December 2017, climbing-up from 5.6 percent in September 2017, and 5.3 percent in December 2016. The increase emanated mainly from food and transport categories of the consumer price index.
“Money supply increased by 3.7 percent in December 2017, compared to a rise of 8.5 percent in September 2017. The slow-down in money supply was due to a moderate increase in domestic claims, coupled with a decline in net foreign assets.”
Dr Matlanyane further explained that credit to private sector grew by 3.6 percent during the fourth quarter of 2017, compared with a lower 0.3 percent increase recorded in the third quarter. This reflected improvement in credit extended to both household and business enterprises.
The current account deficit narrowed to 3.1 percent of GDP in the third quarter from a 7.9 percent of GDP in the second quarter, she explained.
“The improvement in the current account was caused by an increase in exports during the quarter. However, a slow-down in the primary and secondary income offset the gains from a smaller current account deficit. Official reserves decreased slightly from 4.4 months of import cover realized in June, to 4.3 months in September 2017,” she said.
Dr Matlanyane said government budgetary operations were expected to remain in deficit due to under-performance by major components of domestic revenue.