Inflation seen slowing further
Mbongeni Mguni | Tuesday May 23, 2023 06:00
Estimates provided last week by asset management consultancy, Kgori Capital, suggest a cooling of inflation from its previous highs in the coming months. Kgori Capital investment analyst, Kitso Mokhurutshe told Monitor Business that the expected decline was due to “strong base effects”.
In the calculation of inflation, base effects relate to inflation in the corresponding period of the previous year, which if abnormally high, distorts the measurement of inflation in the current period.
A month or period in which inflation spikes may produce the opposite effect a year later, essentially creating the impression that inflation has slowed. Inflation progressively rose last year to a 14-year high in August, driven by fuel and food price increases stemming from Russia’s invasion of Ukraine.
However, fuel prices have generally declined since then, moving inflation from 9.9 percent in March to 7.9 percent in April, although both figures are still above the Bank of Botswana’s (BoB) objective range of between three and six percent.
“The decline in inflation was mainly driven by significant base effects,” Mokhurutshe said. “The fuel price increases of 126t, 125t, 149t and 174t to petrol 93, petrol 95, diesel and illuminating paraffin respectively, that took place towards the end of March 2022 have now fallen out of our Consumer Price Index calculations.” He added: “Inflation is expected to experience another significant decline in May 2023 due to strong base effects. “Without any further fuel price adjustments in the near future, inflation is expected to dip within the BoB’s 3-6 percent objective range as early as next month due to strong base effects but increase beyond it again in the fourth quarter of 2023 as the base effects dissipate.” Kgori Capital’s forecasts are in line with the BoB’s own projections that point to a reduction in the pace of inflation in the third quarter of this year.
The BoB expects that inflation will revert to the three to six percent range by the second quarter of next year. Governor Moses Pelaelo recently told journalists that the projected decrease in inflation in the medium term is due to the weakening impact of the earlier increases in administered prices such as fuel prices as well as modest domestic demand.
The increase in interest rates last year was also tapering demand for credit, while tightening financial conditions globally would also bear down on local inflation. Mokhurutshe told Monitor Business that following the significant decline in inflation in April, Kgori Capital do not expect any changes to interest rates in 2023. “However, pressure on the rand may force the South African Reserve Bank to aggressively hike their interest rates in order to defend their currency. “This may force BoB to raise rates as well in order to avoid capital outflows,” he said.
The central bank raised interest rates three times last year, adding to consumers’ woes, as inflation rose to a peak of 14.6%. Thus far this year, however, the BoB has maintained interest rates, but declined to state that the upward rate cycle has ended. Consumers have suffered over the months as the cost of living has risen sharply, particularly in items such as food and beverages, as well as the cost of transport. Last year, government introduced temporary inflation measures designed to soften the impact of rising prices on consumers. The measures included a temporary cut in VAT to 12% as well as tax cuts on some essential commodities. Earlier this year, the Finance Ministry pushed through legislative amendments that zero rated VAT for salt, sanitary pads, vegetables, cooking oil, infant formula, condoms, baby diapers and Liquefied Petroleum Gas (LPG).