Mainly driven by the increase in Value Added Tax (VAT) effective from April, inflation will not be expected to fall back within the Bank of Botswana's 3 to 6 percent objective range until the first quarter of next year.
VAT will increase from 10 percent to 12 percent in April as announced in the national budget for 2010/11 recently.A statement released by BoB PRO Chepete Chepete yesterday says the Monetary Policy Committee (MPC) anticipates that following a short-term spike resulting from the impact of the increase in VAT, inflation will fall within the 3 to 6 percent objective range only in 2011.
Inflation, which registered a remarkable decrease in 2009 that led BoB to cut the Bank Rate by five percentage points during the year, has been on the increase in the past two months, settling at 6.1 percent in January.
The rise in inflation last month mainly reflects the continuing impact of base effects arising from fuel price reductions in the second half of 2008 and early 2009.
But despite the recent upward movement in the inflation rate, the MPC says it has decided to maintain the Bank Rate at 10 percent as the current state of the economy and the assumptions on both the domestic and external economic outlook, as well as the inflation forecast, suggest that maintaining the prevailing interest rates is consistent with the achievement of BoB's 3 to 6 percent inflation objective in the medium term.BoB says in the short-term, inflation is projected to rise as influenced by, among others, the faster quarterly price increases due to South African price developments, base effects related to fuel price changes, as well as the increase in VAT.
"In the medium-term, inflation is expected to be within the objective range on a sustained basis by the first quarter of 2011," says the statement.
"The risks to this outlook include any substantial upward adjustment in administered prices and government levies as anticipated in the revenue projections announced in the 2010 Budget Speech.
"Moreover, there is a risk that any accelerated world economic recovery may lead to a rise in oil prices. It is anticipated that the pula exchange rate will be largely stable with minimal effect on domestic price developments."
The inflation outlook in the short-term could be further worsened by the anticipated increase in power tariffs as announced by government officials last week.
Describing the BPC as "broke," the Permanent Secretary in the Ministry of Minerals, Energy and Water Resources, Gabaake Gabaake, last week said a possible tariff increase for the BPC was being discussed in the Office of the President.
Commenting on the real economy, the central bank says indications are that the decline in overall output will continue in the short-term and remain below trend while recovering in the medium-term.
"The decline in output is projected to continue into the first quarter of 2010 and GDP will remain below trend in the medium-term," says BoB. "In addition to the slow recovery of world demand for major exports, domestic economic activity will be lower due to reduced government spending."