GABORONE (Reuters) -Botswana’s central bank hiked its main interest rate by 160 basis points on Thursday to try to narrow the gap with market lending rates, which have been driven higher by a liquidity squeeze caused by an economic slump.
The decision takes the Southern African country’s Monetary Policy Rate to 3.5%, up from 1.9% previously.
Botswana’s economy contracted last year and is expected to do so again this year because of a prolonged downturn in the global market for diamonds, its key export.
Banks have been raising their lending rates as liquidity has dried up because of lower diamond sales and increased government borrowing to cover the budget deficit.
The Bank of Botswana said the rate hike should improve monetary policy transmission.
Central bank governor Cornelius Dekop told a press conference that banks were directed not to increase their prime lending rates further.
This month credit rating agency Moody’s downgraded Botswana’s sovereign rating, citing the government’s difficulties adjusting to the downturn in the global diamond industry and increasing government debt.
Inflation accelerated to 3.7% year-on-year in September from 1.4% in August, still within the central bank’s 3%-6% target range.
The central bank now forecasts inflation will rise from an average of 2.7% this year to 5.9% next year.
(Reporting by Brian Benza;Additional reporting by Anathi Madubela;Writing by Sfundo Parakozov;Editing by Alexander Winning)
