Oil price hikes to stem inflation slump

Staff Writer | Friday June 26, 2009 00:00

A report from Motswedi Securities says that although inflation has eased off since late last year, the downward trend might be slowed as a result of resurging oil prices on the international market as well as the potential increase of administered prices, such as electricity tariffs. Crude oil prices on the international market have risen from $32 per barrel in December 2008 to around 71. The prices are threatening to rise further.

'Already here in Botswana, petrol prices have been reviewed by 56 thebe and 55 thebe for diesel in response to the rise in global oil prices. South Africa has also reviewed its pump prices for petrol by around R0.17 per litre. Alistair Darling, UK finance minister, has even warned that rising oil prices could hinder the recovery of global economies,' says the report.

In line with falling inflationary pressures, the Bank of Botswana this week reduced the bank rate from 13 percent to 11.5 percent, the lowest since 1992. 

The bank expects inflation to continue on a downward trend in the mid-term due to the world-wide economic recession as well as the projected below par performance of the domestic economy.

'Meanwhile, we expect commercial banks to adjust their prime rates by the same tandem to levels around 13 percent from 14.50 percent respectively. We believe the reduction in the bank rate is a positive move in the right direction as this will provide further relief to consumers and businesses as they can now access the much-needed funds at a lower cost and this will go a long way in boosting the economy,' Motswedi says in its report
Central banks around the world are reducing domestic interest rates to support their economies. The Botswana central bank embarked on a loose monetary policy in December 2008, when it reduced the bank rate from 15.50 percent to 15 and then 14 percent in March 2009.

Although Botswana has always had relatively high interest rates in the region, the decline in bank rates in recent months suggests that the economy will enjoy the lowest real interest rates in more than a decade.

Announcing the decision to reduce the bank rates, BoB Public Relations Officer, Chepete Chepete, said that although inflation continues to be above the bank's objective range of between three and six percent, it is expected to maintain a downward trend in the medium-term.

'Factors underlying the overall positive outlook for inflation include the world-wide economic recession as well as the projected below-trend performance of the domestic economy. The potential for an increase in administered prices and international fuel prices constitutes an upside risk to the outlook.

However, the current subdued global economic activity and the associated low inflationary environment, with deflation in some major economies, as well as the weak domestic economic performance, should contribute to lower inflationary pressures,' said Chepete.

Speaking at the World Economic Forum in Cape Town recently, BoB governor, Linah Mohohlo, said there is still scope for further reductions in interest rates in the country as inflationary pressures are still easing-off.

In reducing interest rates, the bank says it recognises that the favourable inflation exists in the medium term, which is the relevant time-frame for monetary policy, and provides scope for monetary policy flexibility.

'Going forward, we expect further reduction in the bank rate due to easing inflationary pressures.

We expect inflation to finish the year 2009 at levels between five percent to seven percent,' says the Motswedi the report.