The annual inflation rate could possibly breach the Bank of Botswana (BoB) three percent lower medium term objective as lower fuel prices coupled with weak domestic demand should further ease inflationary pressures in 2015.
In a bid to maintain price stability in the economy, the central bank has set an inflation objective of between 3-6 percent.
Launching the 2015 Monetary Policy Statement (MPS) yesterday, BoB governor Linah Mohohlo said the economy will continue to experience disinflation this year auguring well for the retention of the accommodative monetary policy stance, which has ushered in the prevailing low interest rates regime.
“ Given prospects for benign external price developments as well (as) anticipated modest domestic demand pressures on inflation, it is projected that inflation will continue to be within the 3-6 percent medium terms objective with the possibility of a breach of the lower bound in the short term,” she said.
The lower inflation framework coupled with the prevailing low interest rates regime will be a boon for consumers as it does not only reduces the cost of borrowing for consumers, but also slows the rate at which their purchasing power is eroded. Inflation has been on a downward trend in the past 12 months reaching a four-decade low of 3.6 percent in January 2015. Resultantly, the BoB last week reduced the benchmark bank rate to a 25 year-low of 6.5 percent. According to Mohohlo, the main factors that will contribute to the favourable inflation outlook this year include the low fuel prices, benign domestic demand due to stagnant real personal incomes as well as the recent adjustments to Value Added Tax (VAT).
Central Bank estimates show that last month’s downward adjustments in fuel prices will shed 0.93 percentage points
“The amendments of VAT that came into effect beginning of this year provide some potential for lower prices up to a maximum of 12 percent for the items, which comprise about five percent of the consumer basket,” said Mohohlo.
On the upside risks, she said that recent increase in alcohol levy to 55 percent is expected to add 0.3 percentage points to inflation in 2015. With inflation seen fewer than three percent for the second half of the year and going into the first quarter of 2016, the central bank might again be persuaded to decrease interest rates in bid to encourage productive borrowing by businesses. Credit to business rose markedly from 4.6 percent year-on-year in December 2013 to 19.1 percent a year later. “This rapid increase in business lending moderated the extent of the slack in non-mining GDP growth, which had slowed to 4.7 percent in the twelve months to September 2014, compared to the 5.2 percent growth rate registered a year earlier,” said the governor.
In 2015, GDP is expected to grow at a slower rate of 4.9 percent from an estimated 5.2 percent in 2014 with the non-mining sector expected to drive growth.
According to the 2015/16 budget speech, the anticipated 4.9 percent growth this year will be driven mainly by the non-mining sectors including trade, hotels & restaurants, finance and banking, as well as social & personal services.