Interest rates seen unchanged despite inflation surge

Brian Benza
Staff Writer | Thursday February 18, 2010 00:00

 

The January increase, which is the second in a row, sees the annual inflation rate jumping out of the central bank's 3-6 percent inflation objective.

 The central bank has been implementing an expansionary monetary policy which saw interest rates easing by 9 percentage points in 2009 as inflation fell from as high as 15.1 percent in August 2008 to 5 percent in November last year. According to the statement from the CSO, only one group index, education, recorded a change of more than 1.0 percent between December 2009 and January 2010. The group index registered an increase of 5.8 percent.

'The Education group index moved from 113.8 to 120.4, registering an increase of 5.8 percent between December 2009 and January 2010. The rise was due to increases in the constituent section indices of Pre- Primary & Primary Education (7.0 percent) and Secondary & Tertiary Education (5.2 percent). The rise was mainly attributed to increases in the private secondary, pre-primary and primary education school fees.

'The Transport group index went up by 0.8 percent from 119.6 to 120.6 between December 2009 and January 2010. This was largely due to an increase in the constituent section index of Purchase of Vehicles (2.7 percent),' read the statement. Despite the 0.3 percentage point increase in inflation, analysts believe that, the central bank will not up interest rates as yet as there is still need to stimulate growth in an economy that suffered from the global economic recession.

Fund manger at Investec Asset management company, Bakang Seretse, says there is no need for Bank of Botswana to increase interest rates. 

'Monetary policy is not based on inflation of a month before but rather it is forward looking.  As it is Bank of Botswana expects inflation to be well behaved going forward.  'Currently about 63 percent of the categories are below the Bank's target band with only 36 percent outside.  The transport category is the only worry.

 'Our forecast as Investec is that we will see inflation increasing in the next month then coming down later to settle on upper level of the target band,' he said.

Gary Juma of Motswedi securities also does not see the central bank increase the bank rate as yet.

 'I can see the central bank keeping the bank rate on hold for a while as the economy is still recovering.

A significant increase in inflation is expected in May after the April Value Added Tax(VAT) and I reckon the bank of Botswana should keep rates unchanged until the later part of the second quarter of the year,' said Juma.

Commenting on the effects of VAT Seretse said they expect the increase in VAT to have an impact on inflation by about 2 percent and overall it will take a year or so for the increase to wash out of the system. 

'There shouldn't be any change in monetary policy given that demand in the economy will not necessarily increase.  We should take into account that there will be a wage freeze for civil servants salaries,' he added.