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Fuel price cut to trim inflation by 1.64%

PAULINE DIKUELO MBONGENI MGUNI
Bank Of Botswana
The Bank of Botswana (BoB) expects the recent fuel price reduction to lower inflation by 1.64 percent, a figure that could cut inflation to levels never seen before in the country.

Inflation in May was 2.4 percent down from 2.5 percent in April due to a 0.6% drop in the Transport sub-index of the Consumer Price Index. The drop was due to an average 14.3 thebe drop in fuel prices effected in April.  Last Friday fuel and paraffin prices fell further by an average P1.58, the largest decrease in several years, with the BoB saying this would trigger even lower inflation in the short term.

The central bank had originally projected that inflation would return to the three to six percent target threshold by the fourth quarter of this year, but now expects this to happen in the third quarter of 2021. Inflation, which is the general increase in prices, has been below the target threshold since September 2019 and has not trended above four percent since November 2014.

Low general demand in the economy led by restrained wages, as well as stable administered prices and levies have kept inflation controlled and now the BoB expects prices to slow down even more due to the effects of the coronavirus (COVID-19) on economic activities. “In the April meeting of the Monetary Policy Committee, our forecasts were that inflation would revert to the objective range in the fourth quarter of 2020 but many developments have taken place since then,” the BoB’s head of research and financial stability, Dr Tshokologo Kganetsano told BusinessWeek in a briefing.

“Since that meeting, we have seen a decrease in fuel prices by up to 17.1% that according to our projections will reduce inflation by about 1.64 percent. “In our inflation forecast, we include developments in international commodity prices like oil and food and since the last Committee meeting, the forecasts for both of these has been revised downwards.”

In the absence of major upward

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price pressure from this month going forward, the latest projects suggest inflation will swing even deeper into record territory. Available BoB figures suggest the lowest inflation on record was 2.1 percent but in the absence of major upward price developments in coming months, the coronavirus-led dampening of the economy could push prices into the record books.

Kgori Capital investment analyst, Kwabena Antwi said the low inflation environment would provide more scope for the BoB to cut rates.

“In general, when inflation is low, the BoB will reduce its bank rate.  “This has the consequence of reducing interest rates that commercial banks offer savers and on the other hand also lowers the rate that commercial banks charge their borrowers,” he said.

Motswedi Securities trader, Moemedi Mosele said the impact of the projections for low inflation would be different for savers and investors.

“When inflation is on the rise, it means that in general, goods and services are getting costlier, and if this increase is not accompanied by rising wages, then it means the cost of living is rising faster than the average earning ability, eventually eroding savings. 

“Thus a decline in inflation should have less of an impact on the value of savings of the general public (good for savings) and therefore their savings (deferred spending) becomes a better store of value.

“While savers are looking to store value, investors on the other hand are looking to create value.

“They are willing to spend money (invest) today, with the hope that their investment will yield greater returns in future.

“These investments not only need to compensate the investor for the loss in value due to inflation, but the risk they are taking on that investment.

“Put simply, the required return on an investment equals inflation plus risk return,” he said.



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