CBL sets monetary policy rate

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Central Bank of Lesotho Governor Retselisitsoe Matlanyane

Central Bank of Lesotho Governor Retselisitsoe Matlanyane

Rethabile Pitso

THE Central Bank of Lesotho (CBL) has set the newly-introduced CBL Rate at 6.25 percent to align the cost of borrowing and lending with the region.

Addressing a news conference on Tuesday, CBL Governor Retšelisitsoe Matlanyane said the apex bank’s Monetary Policy Committee (MPC) pegged the rate 6.25 percent after considering Net International Reserves (NIR) developments and outlook, regional inflation and interest rate outlook, domestic economic conditions and the global economic outlook.

“Having considered all these factors, the MPC decided to set the newly-introduced CBL Rate at 6.25 percent. At this rate, the domestic cost of borrowing and lending will be aligned with the cost of funds elsewhere in the region,” said Dr Matlanyane.

“This alignment is important in ensuring that the policy rate is used as a reference for commercial banks when setting their interest rates. Furthermore, this rate will ultimately assist in the management of the excess liquidity currently prevailing in the system.”

She noted that while price stability was the CBL’s primary mandate, it had to be underpinned by the maintenance of a level of reserves that would enable an exchange of one loti for one rand.

“After taking into consideration the various demand and supply factors that influence the NIR level, the NIR target floor has been revised downwards from US$710 million (about M1.01 billion) to US$635 million for the first quarter of 2016, and at this level the NIR is considered adequate/sufficient to support the exchange rate parity between the loti and the South African rand and therefore to preserve the price stability,” Dr Matlanyane said.

The NIR position, she said, remained above the target floor of

US$710 million.

“In terms of the outlook, the NIR position is projected to remain above the new target floor of US$635 million for the entire forecasting horizon of three quarters, with cyclical peaks and troughs at the beginning and end of every quarter, respectively. Consequent to the cyclical pattern, the position is envisaged to decline in February and

March 2016, but still close the quarter above the target floor,” said Dr Matlanyane.

The CBL boss also noted that domestic inflationary pressures increased, with the annual rate of consumer inflation rising from 2.9 percent in June to 3.8 percent in September 2015.

“This was largely driven by both food and non-alcoholic beverages components. Price developments in Lesotho are expected to continue to move in line with those in SA over the medium-term because of trade relationships between the two countries.

“On the outlook, the risks include the weak exchange rate of the rand (hence the loti) against the major trading partners’ currencies,” she said.

Dr Matlanyane further noted that while international food prices were expected to stabilise, weather-related  risks  to  crops  production  heightened by  drought  conditions  were likely  to  exert  upward pressure on both regional and domestic food prices.

She also touched on money supply, saying it expanded by 6.1 percent during the third quarter following a contraction of 0.4 percent in the second quarter.

“This expansion in money supply was a result of an increase in net foreign assets attributable to a pick-up in commercial banks’ other deposits with foreign banks,” said Dr Matlanyane.

“The prime lending rate increased from 10.44 percent in June to 10.69 percent during the third quarter. However, the 91-day Treasury Bill rate remained unchanged at 6.25 percent. The domestic and SA Treasury bill rates remained aligned.”

On the external sector front, she said there was improvement in the third quarter.

“The current account deficit narrowed to 4.8 percent of GDP during the third quarter, after a revised deficit of 7.2 percent of GDP in the previous quarter.

“This positive development is due to an increase in merchandise exports due to the growth in textiles and clothing exports as well as an improvement in diamond exports, while current transfers slowed down as a result of a decline in SACU (Southern African Customs Union) receipts,” Dr Matlanyane said.

“Gross international reserves measured in months of import cover declined to 6.1 months in the third quarter from 6.3 months in the previous quarter, on account of an increase in payments for imports.”

She also noted that government budgetary operations had resulted in a deficit of 6.3 percent of GDP at the end of September 2015 compared with a surplus of 14.9 percent of GDP realised at the end of the second quarter.

“In terms of the outlook, fiscal balance is expected to remain in deficit territory in the next two to three fiscal years, largely attributable to the decline in SACU revenue,” Dr Matlanyane said, adding that the MPC  would  continue  to  monitor  domestic  and  international developments  and  to  undertake appropriate policy decisions to ensure that the loti-rand exchange rate parity is maintained.

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