Inflation falls below BoBís objective range

Fuel prices decreases have pulled inflation down to a four decade low
Fuel prices decreases have pulled inflation down to a four decade low

The annual inflation rate fell further below the Central Bank’s medium-term objective range of 3-6 percent in February, reaching an all time low of 2.8 percent.

According to the latest Consumer Price Index (CPI) figures released by Statistics Botswana (SB), this represents a drop of 0.8 of a percentage point on the January 2015 rate of 3.6 percent. The figure was lower than the 4.6 percent recorded during the same month in 2014 as the effects of the drop in fuel prices continue to be felt across the board.

The downward movement of annual inflation rate between February 2014 and February 2015 was attributed to the decline in prices of commodities in the main component of transport, which dropped by 7.3 percentage points.

Analysts say the latest drop in the annual inflation rate to an all-new four-decade low, provides scope for the Bank of Botswana (BoB) to reduce interest rates.

RMB Global Markets Research analysts, Nema Ramkhelawan-Bhana and Celeste Fauconnier stated that if inflation is sustained at current low levels, the Central Bank might counteract these developments by a further rate cut to loosen the monetary conditions further as the governor continues to be more dovish. “Should the risk of a rate cut translate without structural reforms, we do not expect the market conditions to improve,” they warned.

The analysts pointed out that any further rate cut may be stalled by the likelihood of a Federal Reserve Bank (Fed) hike, if it has a significant impact on Botswana’s real effective exchange rate, and a South African Reserve Bank (SARB) hike, since the real rate differential has moved towards the bottom of the historical ranges and would decline further, giving little scope for further cuts.

They also said despite an expansionary monetary stance, actual monetary conditions have swung from being exceptionally easy to being exceptionally tight as a result of liquidity constraints. The analysts further indicated that the local market is experiencing stagnant economic growth, declining purchasing power, counteractive fiscal changes and banking operations, which are tightening the monetary conditions, resulting in limited lending capacity. “We expect the tight credit conditions to eventually ease, either because bank lending reduces further, banks find new sources of offshore financing or because the BoB acts to inject liquidity,” they said.

Professor Narain Sinha, an economics lecturer at the University of Botswana (UB) said BoB has to cut down on the interest rates, stating that whenever there is high-expected inflation, governments or the central banks around the world take appropriate steps to minimise the ill effects of inflation to a certain extent through fiscal or monetary policies, respectively. He, however, acknowledged that a very low inflation rate is not good for the economy as it leads to a higher unemployment rate.

Dr Keith Jefferis, managing director of Econsult Botswana, said inflation dropping below the medium-term objective range does not mean much since it is a temporary decline, noting that it will in due course increase. He further said it is a good thing for inflation to maintain a downward trajectory, saying it means that prices are rising more slowly so incomes maintain more of their real value.

Jefferis also said this drop augurs well for accommodative monetary policy. “It is good news, but it is temporary and mainly due to falling fuel prices, not a generalised decline in the rate of price increases. Core inflation is in the range of 3-5 percent depending on the measure used,” he said.

Editor's Comment
What about employees in private sector?

How can this be achieved when there already is little care about the working conditions of those within the private sector employ?For a long time, private sector employees have been neglected by their employers, not because they cannot do better to care for them, but because they take advantage of government's laxity when it comes to protecting and advocating for public sector employees, giving the cue to employers within the private sector...

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