The Bank of Botswana (BoB) expects inflation to spend the next two years or longer hovering around the lower three percent threshold, despite a marginal, transitory uptick in the latter part of next year.
In its October Monetary Policy Report released on Monday, the central bank projected that factors such as modest trading partner inflation, the relative strength of the pula against the rand as well as benign oil and food inflation, would keep inflation under check in coming months. The BoB has a three to six percent medium term inflation target, which it supports through reviews of interest rates and open market operations.
One major factor keeping inflation prospects low is the restrained growth in domestic economic activity, which has an impact across the board.
“When inflation is low, as is currently the case, inflation expectations tend to be low and, thus, this reinforces low wage growth.
“Therefore, the low inflation prospects suggest that the nominal wage growth is likely to continue to be around the three percent to four percent range, as in the recent past.
“However, should growth in nominal wages rebound, maintaining positive real wage growth would have to be accompanied by a sustained increase in productivity in order to counteract wage-push inflation.
“Even so, it is unlikely that domestic demand pressures would rise substantially
According to central bank calculations, inflation, which was pegged at 2.9% in September, should end the year at just above three percent, continuing roughly at this level until July 2019. From September 2019, however, inflation should tick up marginally to just below four percent and hold around this level for at least a year.
The uptick from September 2019, the BoB says, comes from expected increases in South African inflation and international oil prices. Higher food prices stemming from the anticipated El Nino climate phenomenon’s impact on agriculture this season, will also pressure local inflation.
However, the BoB expects the downside risks to inflation to dominate the outlook and keep the key rate around the lower bounds of the threshold.
“It is expected that domestic demand pressures on inflation will remain weak in the short to medium term, mainly on account of restrained growth in personal incomes and subdued growth in economic activity,” the report reads.