Inflation seen inching higher

Mbongeni Mguni | Wednesday August 27, 2025 15:52

The central bank now expects inflation next year to average 5.9 percent, up from the 4.6 percent forecast in June.

Speaking at a briefing held after the August Monetary Policy Committee meeting last week, BoB governor, Cornelius Dekop, said the inflation outlook had changed significantly due to both exchange rate and retail price increases associated with the July 11 adjustment of the pula exchange rate framework.

On July 11, the government, the Ministry of Finance, and the BoB, through a series of actions around the pula, its value and trading environment, sought to boost exports and also make access to the official foreign exchange reserves costlier for commercial banks.

As a way of protecting the declining official foreign reserves, the BoB intended to push banks to trade foreign currency amongst themselves using their stockpiles, which were estimated recently at about P21 billion.

Commercial banks instead increased their foreign currency trading rates to customers well beyond the margins guided by the BoB’s July 11 move, triggering price increases across the economy by various firms.

“In the circumstance, inflation is projected to increase in the short term, averaging 3.5 percent in 2025 and 5.9 percent in 2026, but temporarily breach the upper bound of the objective range in the second quarter of 2026,” Dekop said.

The central bank’s objective range is set between three and six percent, which is deemed the ideal limit for healthy economic activity and growth.

However, briefly next year, in the second quarter, the BoB expects inflation to touch seven percent, before returning to the objective range, Dekop said.

The governor stressed that generally, however, demand pressures were demand in the economy and supportive of stable inflation. Risks to the inflation outlook are seen as tilted to the upside, due primarily to the market reaction following the pula exchange rate framework decisions.

“Additionally, potential cost-push pressures and second-round effects stemming from the recent increase in water and electricity tariffs for businesses are anticipated to further elevate the inflation projection,” Dekop said.

Meanwhile, local businesses expect inflation to average 3.4 percent this year, before rising to 4.1 percent next year. According to the June Business Expectations Survey by the BoB, in which firms in 13 sectors were sampled, the majority expect cost pressures to decrease in the second quarter of 2025 compared to the first quarter. This is mainly due to the anticipated decline in input costs, particularly for materials, transport and other inputs.

“However, this outlook is likely to change going forward, given the unintended market responses to the recent adjustment of exchange rate parameters,” the BoB said. “In particular, the increase in the trading margins at which the Bank buys and sells foreign currency to commercial banks has resulted in unwarranted price increases for some goods and services, reflecting the high import intensity of the Botswana economy.”