Inflation sinks to all-time low
Pauline Dikuelo | Friday July 24, 2020 17:42
At that level, inflation is at its lowest in the country’s history, according to available records.
The Botswana Energy Regulatory Authority (BERA) last month dropped fuel and paraffin prices by an average P1.58, the largest decrease in several years and the second this year since the average 14 thebe [per litre] decrease in April.
With no reviews of fuel prices throughout 2019, the reduction meant a significant decrease in the Transport sector of the Consumer Price Index (CPI), the measure of inflation. Transport carries the heaviest weighting in the CPI at 23.43% meaning even marginal changes in the sector influence overall inflation.
Inflation’s rock bottom position has ignited debate amongst local analysts, as the economy enters uncharted territory. The Bank of Botswana slashed the bank rate at the end of April and has said more cuts could be made, given the space provided by low inflation and the need to support the return to positive economic activity.
IPRO Botswana analyst, Mothusi Kemorwale told BusinessWeek low inflation would have a mixed impact, depending on the point of view of the sector affected.
“The bank rate implies low interest income for savers, which disadvantages those who are in or nearing retirement as conventional wisdom is to move them to cash and interest earning assets,” he said.
“Savers are then pushed to move away from cash and deposits to invest in riskier assets to protect returns, which may include stocks and property, which is what slashing the bank rate seeks to achieve (move investment and reduction of negative output gap to increase inflation).”
However, for investments, Kemorwale said bond prices move inversely compared to interest rates, as do stocks and property, generally.
“For bonds and stocks, the reason is that savers ‘reach up’ to the higher yield by piling in risk assets, while for property the net income increases as debt service reduces with reducing interest, thus increasing its appeal.”