Analysts forecast interest rates cut
| Wednesday February 18, 2015 18:00
The annual inflation rate was recorded at 3.6 percent in January this year, a decrease of 0.2 of a percentage point on the December 2014 rate of 3.8 percent. The downward movement of annual inflation rate between January 2014 and January 2015 was attributed to the decrease in prices of commodities in the main component of transport, which dropped by 3.0 percentage points.
According to analysts at RMB Global Markets Research, the inflation rate is likely to end the first half of the year below 3.5 percent providing room for the central bank to cut the benchmark bank rate by half a percentage point.
“Recent changes of zero-VAT on some basic food items, exchange rate changes and fuel price decreases are all deflationary and are likely to result in inflation printing lower than our previous estimate of a trough of 3.5 percent by the first half of the year.
“As inflation remains within the medium-term objective and continues to moderate faster than anticipated, it is more likely that the BoB will reduce rates by 50 basis points in 2015,” said the experts.
The central bank last adjusted interest rates in December 2013, when the annual inflation arte stood at 4.1 percent.
Figures released by Statistics Botswana last week show that the fall in the inflation rate was mainly due to sustained low oil prices and benign external demand prospects, offering relief to imported inflation.
However, for the month, the drop in most of the inflation basket components was counteracted by increases in alcoholic beverages, tobacco and narcotics, mainly due to the five percent levy introduced in December. Government last week reduced fuel prices for the second time in as many months, a development that is going to ease inflationary pressures in 2015.
Following last week’s decrease, consumers now pay around P7.96 for a litre of petrol in Gaborone after a P1.04 decrease per litre.
“Given the prevailing global supply situation, we do not anticipate any major rebound in the price of international crude oil prices in the short to mid-term, providing us with room for another petrol price reduction.
“Although the Pula has weakened against the Rand for the year thus far, the local unit has been firmer to the rand, helping curtail imported inflationary pressures from South Africa hence we saw the decline in food and non-alcoholic beverages section.
“Given the downtrend of inflation, going forward, we could see a rate cut from the central bank as a mission to propel the economy,” concurred researchers at Motswedi Securities.
However, in an earlier interview prominent economist Dr Keith Jefferis differed with the other analysts, arguing that the central bank should not react to the latest drop in inflation as it is a temporary trend only primarily driven by the cut 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 fell from 3.7 percent to 3.6 percent in January 2015, while inflation excluding administered prices declined from 4.9 percent to 4.8 percent. 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, where interest rates are normally reviewed, is expected at the end of this month.