Inflation sinks to fresh low
Brian Benza | Friday January 16, 2015 12:46
Figures released by Statistics Botswana yesterday, show that the decline was largely on the back of fuel price decreases effected in December last year as government reduced petrol and diesel prices in tandem with falling international oil prices.
The December inflation is the lowest rate since Botswana adopted the pula currency in 1976, with the previous lowest recorded in June 1972 at 3.5 percent.
This fall in inflation rate doesn’t however mean that prices are down but rather indicates that general prices of goods and commodities are rising at a slower rate.
“Annual inflation in December 2014 was also lower than the 4.1 percent recorded during the same month in 2013. The downward movement of annual inflation rate between December 2013 and December 2014 was mainly attributed to the decrease in prices of commodities in the main component of transport, which dropped, by 2.6 percentage points.
“The decrease in operation of personal transport section index was attributed to the drop in retail pump prices for petrol and diesel by P0.60 per litre each, which effected on the 6th December 2014,” said SB.
Further fuel priced reductions are expected in Botswana soon as international oil prices have fallen to a six year low. Although international oil prices have lost over 50 percent of their value to under $50 a barrel over several months in 2014, Botswana has only effected a single fuel price reduction.
“Falling oil prices have been a very minor benefit here in Botswana (from P9.6 to P9.0). With price control in petroleum products the lag time is much longer than in an unregulated market situation and we should expect several months of gradual price decreases, ” Professor Roman Grynberg told BusinessWeek.
With inflation edging towards the lower end of the Bank of Botswana 3-6 percent objective, some analysts have cautioned that declining prices are not the result of targeted monetary policy, but are rather a symptom of weak aggregate domestic demand.
GDP Statistics released by the SB recently show that economic growth has been slowing down with real GDP in the nine months to September at 4.8 percent, compared to 5.9 percent in the same period of 2013.
“It would have been ideal to have easing inflationary pressures accompanied by increased domestic demand and achieved through deliberate policy instruments geared towards reducing inflation,” said another analyst with a local asset management firm. However prominent economist Dr Keith Jefferis says that the 3.8 percent should not be cause for any red flags as it is a temporary trend only driven primarily by the drop in fuel prices. “This is the time when we should look at core inflation rather than headline inflation. The recent decline is driven by fuel prices, which I believe, are still going to come down again. The core inflation measure will depict the correct picture of the underlying inflation. So even if Inflation was to fall below the three percent lower benchmark, there would still be no reason for monetary authorities to react,” said Jefferis.
Core Inflation registered a drop of 0.1 of a percentage point, moving from 5.0 percent to 4.9 percent, between November and December 2014.
In a monetary policy stance decision announced last December, in which it kept the benchmark bank rate steady at 7.5 percent, the BoB acknowledged the weak inflationary pressures in the medium term.
The next monetary policy committee meeting sitting is expected at the end of this month.
Chief Investments officer at Afena Capital, Alphonse Ndzinge said that the current trend of declining inflation is not a cause for concern as the economy has experienced benign domestic demand pressures for some time now underpinned by very modest real wage growth, relatively low employment growth, and restrained growth in government expenditure. “The recent trend of slowing household credit growth rates and the reduced contribution of household consumption to GDP growth figures clearly indicate depressed aggregate demand for which the central bank has evidently anticipated with its accommodative monetary stance,” said Ndzinge.