The Bank of Botswana’s monetary policy committee is unlikely to cut interest rates when it meets at the end of the month despite inflation falling to the lowest rate in 42 years, analysts believe.
The December headline inflation fell to 3.8 percent last week, providing scope for further lowering of interest under the central bank accommodative monetary policy stance.
However, analysts believe the recent inflation rate fall is primarily pushed by the temporary drop in fuel prices, and does not signify any easing of underlying inflationary pressures.
“The 3.8 percent should not be cause for much concern or excitement as it is a temporary trend only driven primarily by the drop in fuel prices.
“Remember in 2008, when inflation went up to 15 percent on the back of fuel price rises, the Bank of Botswana didn’t adjust interest rates. So even if Inflation were to fall below the central bank’s three percent lower benchmark, there would still be no reason for monetary authorities to react.
“This is the time when we should look at core inflation rather than headline inflation. The core inflation measure will depict the correct picture of the underlying inflation,” said economist Keith Jefferis.
Core Inflation registered a drop of 0.1 of a percentage point, moving from 5.0 percent to 4.9 percent, between November and December 2014.
In a period of falling underlying inflationary pressures, central banks normally cut interest rates to boost economic growth by productive lending that is more affordable.
A decision on any adjustments to the bank rate is expected at the next monetary policy committee meeting sitting at the end of this month.
The Bank of Botswana last adjusted interest rates in December 2013, a year in which the benchmark bank rate was reviewed downwards by two percentage points.
In a monetary policy stance decision announced last December, in which it kept the benchmark bank rate steady at 7.5 percent, the BoB acknowledged the weak inflationary pressures in the medium term.
In a market commentary, RMB global markets researchers Nema Ramkhelawan-Bhana and Celeste Fauconnier said Botswana inflation is likely to continue on the downward path to reach 3.5 percent by the middle of the year.
“ Inflation averaged 4.4 percent in 2014 and we expect 4.0 percent in 2015, with relief from imported inflation as South Africa’s CPI is anticipated to decline further.
“The continued drop in oil prices will also provide the needed respite and could push inflation to a trough of 3.5 percent by half year 2015,” said the analysts.
However, the central bank has warned that the favourable inflation outlook could be adversely affected by any unanticipated large increase above the current forecast for administered prices, government levies and/or international food prices.
Pulled down by weak demand, the non-mining sector is performing below trend as government restrains expenditure while real personal incomes are weakening. Faced with sluggish economic growth the central bank says that the current monetary policy stance is in support of productive lending to spur growth.
“Credit growth is deemed to be supportive of economic activity, with household debt assessed to be at sustainable levels and posing no threat to financial stability,” says the central bank. Despite stagnant interest rates in the past year, the credit growth to businesses has not increased significantly. This reflects the sluggish growth in the non-mining private sector. Analysts have fingered the pessimistic operating environment for the private sector characterised by weakening personal real incomes and government spending restraint for the weak credit growth to business.