Inflation for June was measured at 10.7%, unchanged from May representing the highest level since December 2022, when Russia’s invasion of Ukraine earlier that year triggered a global spiral of food and fuel prices.The trend this year is linked to the continuing impact of the fuel price increases effected in March, with the central bank forecasting inflation to average nine percent this year, well above the three to six percent objective range.The BoB has said risks to the outlook are largely skewed to the upside, mainly from fuel and administered prices as well as regional food-supply pressures.For the central bank, the challenge in controlling inflation lies in the fact that prices are being pushed up across the economy by factors outside the country, rather than local demand, which neutralises the effectiveness of interest rate hikes, the primary instrument used by the BoB in managing inflation.“It's a challenge, but we manage it through three elements,” Kealeboga Masalila, deputy BoB governor, told BusinessWeek recently. “One is economic independence of the central bank, and another related to that is credibility of the central bank, and lastly, communication. All these things are related.”The deputy governor said that communication is in the sense that when the BoB says it has forecast a certain number as inflation, this projection has to be believable to manage inflation expectations.That credibility, he said, comes from the independence the central bank has in managing its inflation mandate.“There should be independence around managing that, such that to the extent that this actualisation of our projection occurs frequently, it becomes believable and generates integrity and credibility. “Those that are responsible for raising prices, such as businesses, those involved in wage negotiations, are then able to negotiate around the inflation objective. “Then because they negotiate around the inflation objective, the actual inflation outcome, therefore, becomes that inflation objective,” he said.He said when businesses are confident that the BoB’s inflation forecasts are accurate and independently produced, they can negotiate factors that weigh on inflation more in line with what the central bank sees as the inflation forecast.“People can negotiate where the forecast is valid. “Businesses can believe that inflation is going to be within the three to six percent range next year and therefore, costs to them are going to rise by that amount. “Therefore, they will set prices based on the likely increase in costs around three to six percent and therefore, the actual inflation becomes that. “So, it's managing expectations through essential communication,” he said.When inflation is demand-driven, also known as demand-pull inflation, the BoB can deploy its primary instrument of hiking interest rates to control liquidity and therefore the appetite for goods and services.However, with inflation being driven by fuel price increases and their secondary effects in the economy, the BoB has said its primary objective is to manage inflation expectations.Consumers are expected to receive some respite from inflation in July, following the fuel price reductions effected by the Botswana Energy Regulatory Authority on July 6. That relief will, however, be short-lived as the energy regulator has also approved a nine percent across the board increase in electricity tariffs due to start on August 1.
