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Borrowing costs spike as interest rates go up

Business

Bereng Mpaki

People with existing loans will pay more to service their loans after the Central Bank of Lesotho (CBL) recently increased the CBL rate from 7.25 percent to 7.50 percent per annum.

The costs of borrowing have been rising over the past year as the CBL kept on hiking the CBL rate in an attempt to control inflation.

In November 2022, the CBL hiked the CBL rate from 6.25 percent per annum to 7.00 percent per annum, before increasing it from 7.00 percent per annum to 7.25 percent per annum in February 2023.

The CBL is the rate at which commercial banks borrow funds from the CBL. Any changes in this rate mean that commercial banks also have to adjust their own prime lending rates to their clients.

In line with the CBL rate change, commercial banks will soon announce their new lending rates. 

While an increase in interest rates makes borrowing more expensive, it also makes lending or investing more lucrative.

This means people who have investments in financial institutions will earn better returns following the latest CBL rate hike.

The CBL also maintained the net international reserves (NIR) target floor at USD640 million, to maintain the one-to-one exchange rate peg between Loti and the South African Rand.

These developments were announced this week by the Monetary Policy Committee (MPC) of the CBL following its meeting.

The committee considered global, regional, and domestic economic developments, as well as the financial markets developments to guide its monetary policy decisions.

“Having considered the NIR developments and outlook, regional inflation and interest rate outlook, domestic economic conditions, and the global economic outlook, the MPC decided to maintain the NIR target floor at USD640 million,” said CBL governor, Dr Maluke Letete.

“At this level, the NIR target will be sufficient to maintain a one-to-one exchange rate peg between Loti and the South African Rand. Increase the CBL rate by 25 basis points; from 7. 25 percent per annum to 7. 50 percent per annum.”

Dr Letete said economic activity in the country is estimated to have declined by 2.6 percent in January this year, due to the weak performance of the transport, construction, and financial sub-sectors.

“In terms of the outlook, the economy is expected to improve largely on account of construction activities of which LHWP Phase II will contribute the largest share.”

He said food prices have been pushed higher by the weaker Loti.

“As such, domestic inflationary pressures heightened in February 2023 mainly driven by increasing food prices. Inflation rose to 7.4 percent in February compared to 6.8 percent observed in January 2023.”

There was an increase of 1.7 percent in money supply in February 2023, as a result of a significant increase in commercial banks’ foreign assets.

“The Commercial banks’ assets were boosted by construction activities relating to LHWP Phase II, which received substantial inflows that provided a boost to commercial banks’ deposits. Private sector credit rose because of credit extended to businesses while credit extended to households remained unchanged.

The level of CBL’s net international reserves (NIR) deteriorated between January and March 2023, Dr Letete said.

“This was a result of commercial banks’ net outflows during the review period. However, the NIR remained above the target floor of USD640 million set by the MPC in its meeting in January 2023; which was adequate to support the loti-rand exchange rate peg. The NIR is expected to improve in the second quarter of 2023 due to the anticipated recovery in SACU revenue.

“In summary, global economic prospects for 2023 have generally improved. Growth is expected to be boosted by pent-up demand and a faster fall in inflation in most economies. Inflation is expected to continue decelerating due to amongst others improved supply of grains and other food stuffs from Ukraine following the renewal of the Black Sea Grain Initiative.

“The domestic economy is projected to improve in the medium term on account of construction activities associated with the LHWP Phase II project.”

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