Interest rate hike looms
Brian Benza | Tuesday May 20, 2014 15:14
Citing a favourable outlook the BoB cut the benchmark bank rate by two percentage points last year to 7.5 percent as inflation, measured by Consumer Price Index (CPI), eased to a four-decade low.
However, inflation quickened slightly to 4.5 percent year on year last month from 4.4 percent in March and analysts forecast the trend to continue for the remainder of the year although it will remain within the central bank’s 3-6 percent objective.
In a market commentary, researchers at Rand Merchant Bank (RMB) yesterday said that while higher inflation has come from domestic sectors, there is a lot more inflation that will come through from imported goods in the coming months.
“Domestic demand is proving weaker than expected so inflationary pressure is being offset. Furthermore, risks to this forecast are now to the upside. The main danger is we see further rand weakness, which would add to imported inflation,” said analysts Nema Ramkhelawan-Bhana and Celeste Fauconnier.
They further noted that, “Administered and food prices are also at risk and we expect the central bank to hike the bank rate by 50 basis point by the end of the year. We maintain our forecast of 4.5 percent inflation for 2014”.
Any upwards adjustments to the bank rate will be felt most by borrowers who have been enjoying favourable interest rates on loans since the 200 basis point bank rate cut last year.
A decision on any review of the bank rate is expected at the next Monetary Policy Committee (MPC) meeting to be held in June.
In their 2014 first quarter economic review report, researchers at Econsult also predicted a rising inflation trend this year with the CPI forecast to end the year at around five percent.
The MPC maintained its bank rate at 7.5 percent at its previous meeting in April, saying the economic outlook and inflation forecast is consistent with keeping inflation in the bank’s 3 percent – 6 percent medium-term objective.
A rebound in the South Africa economy is also expected to export inflationary pressure to Botswana. According to RMB Global Markets Research, risks to the Botswana’s inflation outlook come from South Africa where inflation has been contained by weak economic growth thus far, preventing a spillover into Botswana.
“The biggest medium-term threat is that the Bank of Botswana increases the rate of crawl on the pula,” read the RMB market commentary.
Due to deliberate exchange rate policy by the Bank of Botswana, the Pula has appreciated against the rand by 8.7 percent since April 2013, deflating imported inflation from South Africa where Botswana gets the bulk of its imports.
According to the central bank, moderate domestic demand and the forecast benign external price developments contribute to the positive inflation outlook in the medium term.
While Botswana’s gross domestic product (GDP) growth in the 12 months to September 2013 was estimated at 5.9 percent due to a 11 percent rebound in mining production, it is expected that non-mining output will remain below potential in the medium term and generate low inflationary pressures.
“The influence of demand on economic activity is projected to be moderate, largely reflecting trends in government expenditure and personal incomes.
“However, this outlook could be adversely affected by any unanticipated large increase in administered prices and government levies, as well as international food and oil prices increasing to levels beyond the current forecast. An increase in demand and inflation expectations arising from a substantial wage adjustment could also change the outlook for inflation,” said the MPC in April.