Strong Pula to keep inflation subdued
Isaac Pinielo | Friday November 28, 2014 14:47
The country’s inflation was recorded at 4.34 percent in October of 2014. It averaged 8.03 percent from 1997 until 2014, reaching an all time high of 15.06 percent in November of 2008 and a record low of 4.12 percent in December of 2013.
This is within the Bank of Botswana objective range of three to six percent.
In an interview with BusinessWeek, investment analyst at Blackthread Capital, Karabo Tladi said with international oil prices declining to levels around US$80 a barrel, it is expected that inflationary pressure will continue to weaken.
He noted that declining inflationary pressure will result in declining international food prices, which have higher weight on inflation basket. He said food and non-alcoholic beverages have the largest weight of 21.8 percent in the country’s inflation.
Tladi further indicated that low inflation is good news for the economy especially at the time when consumer disposable income is under a lot of pressure.
“Declining rate of inflation means declining rate of price increases for goods and services which is a good thing for household consumption. Household consumption is a very important component of Gross Domestic Product (GDP),” he explained.
He added that low inflation also means lower nominal and real interest rates, which reduce the cost of borrowing. He said this encourages households to buy durable goods, such as houses and autos.
“It also encourages businesses to invest in order to improve productivity so that they can stay competitive and prosper without steadily having to raise prices,” he said.
Although it is a good thing when inflation is declining, Tladi said it has to be within acceptable levels or within the central bank objective range.
“We don’t want to start having deflation when prices are declining. When prices decline supplies or producers are reluctant to supply or produce. They will start cutting or reducing production,” he said.
He said that the Organisation of Petroleum Exporting Countries (OPEC) meeting this week is most likely to agree to reduce or cut production due to declining oil price on the international markets.
Tladi also noted that the real beneficiaries of lower inflation are consumers in the form of lower food and service prices. He said pensioners also benefit from lower inflation because they get a fixed income after retirement until death.
Garry Juma, a market analyst at Motswedi Securities, also concurred that with lower inflation, the economy at large will benefit. He noted that consumers will benefit from stable and in some cases lower prices.
“The consumer space should see stronger growth now that inflationary pressures have eased and the whole economy at large. We are likely to see increased spending as prices stabilise,” he said.
In addition, he said interest rates will also be lower and that this makes borrowing cheaper. He said government can also borrow from the local market at lower levels of interest rates adding that individuals can also borrow at lower interest rates and that pensioners’ money will also be cushioned against the erosion of their disposable incomes.
Juma further explained that when inflation is low, consumers and businesses are better able to make long-range plans because they know that the purchasing power of their money will hold and will not be steadily eroded year after year.
However, on the negative side, Juma said low inflation induces lower interest rates, which in turn discourages savings, holding other things constant.
Also, in the short term, the economist asserted that lower inflation might force business to reduce their prices as has happened with most local retail stores.
“Prices of some commodities have come off on a year on year basis and this might reduce their revenue,” he said.
Juma nevertheless said the long term benefits are more as stable inflation enables businesses to plan ahead and that low prices in turn may induce more spending by consumers which in turn increases business revenue.
The Central Bank’s Monetary Policy Statement, which maintains the medium-term three-year objective range for inflation at 3 – 6 percent, noted that while prospects for both the global and domestic economies have improved, recovery from the recent downturn remains fragile. According to the bank, subdued inflationary pressures allow a neutral monetary policy stance that can continue to support economic growth.
The bank however said it will continue to guard against upside risks that could jeopardise achievement of the inflation objective.