BoB adopts neutral monetary policy

Brian Benza
Staff Writer | Monday March 1, 2010 00:00

 

Speaking at the launch of the Monetary Policy Statement 2010 in Gaborone last week, BoB governor Linah Mohohlo said the challenge facing monetary policy is the desire to strike a balance between supporting the still fragile economic recovery and rein in potential pressures on inflation

'The outlook for inflation and output suggests a largely neutral monetary policy stance in the medium-term.Notably, inflation, which is forecast to stabilise within the objective range in the medium-term, is expected to increase in the short-term due to transitory supply side factors, while underlying inflationary pressures are projected to be low,' she said.

A neutral monetary policy strives to set the bank rate, as seen by the monetary policy committee, at levels that neither over-stimulates nor unnecessarily slows the pace of the economic growth.

Last year the central bank adopted a loose monetary policy as a way of boosting the ailing economy constantly reducing interest rates by a cumulative 5 percentage points in 2009.

Inflation on the other hand eased considerably last year, as the economy cooled, to as low as 5 percent in November, the lowest in years.  The bank says that in the short term, the VAT adjustment, proposed government levies, administered prices such as power tariffs and BHC rentals as well as possible oil price rises all threaten the inflation outlook.

' It is anticipated that the increasing VAT will add 1.7 percentage points to inflation from the second quarter of 2010:

' Overall, on the basis of the current information, it is expected that inflation will rise in the short term, and stabilise around the bank's medium-term objective range of 3-6 percent next year,' she said.

As a result of these factors, Mohohlo says that consistent with the central bank's mandate, they shall continue to respond in a timely manner to any deviation of the medium-term inflation forecast from the inflation objective.

Commenting on the exchange rate, the governor said that there would be a modest downward crawl of the Pula exchange rate in order to support international competitiveness of the domestic industries and to enhance prospects for sustainable economic diversification.

The downward crawl has been necessitated by the fact that the Bank's inflation objective remains higher than the forecast average inflation of trading partner countries.