Inflation accelerates to 13-month high

The annual inflation rate in January 2017 accelerated to 3.1%, an increase of 0.1 of a percentage point on the December 2016 rate of 3.0%. This is the highest inflation rate has been in 13 months, as the Consumer Price Index (CPI) was last above three percent in December 2015.

Figures released by Statistics Botswana show that the inflation rates for regions between December 2016 and January 2017 indicated that Cities & Towns went up to 3.1% from 2.8%, urban villages’ decreased to 2.8% from 3.0%, and rural villages’ increased to 3.6% from 3.5%.

“Three group indices recorded changes of at least 1.0% between December 2016 and January 2017, Education (4.0%), Food & Non-Alcoholic Beverages (1.0%) and Alcoholic Beverages, Tobacco & Narcotics (1.0%).” – Statistics Botswana

Analysts believe that the inflation trajectory now points to an acceleration of up to around 4.0% by mid-2017. Although still benign, because of the forecast, analysts continue to see the central bank holding interest rates steady throughout this year.

Standard Bank analysts said in a market report;

“However, as economic growth gains further traction in 2018, we believe that the MPC may look to recalibrate policy in line with higher nominal GDP growth.

We thus stick with our view of 100 basis points rate hikes in 2018.

Following the introduction of a re-weighted and re-based CPI from Statistics Botswana last October, the weight of Botswana’s food and non-alcoholic beverages index is now just 16.5% of the basket – significantly down from an already low 21.84%, and similar to South Africa’s 15.4% weight.

Similarly, the weight of alcohol and tobacco also came in lower, at 7.83%, from 9.29% previously. With this down-weighting, it is only reasonable to expect that pass-through from food, alcohol and tobacco prices to headline inflation may be lower than before.”

Core inflation excludes the prices of food, non-alcoholic beverages, petrol and energy; increased to 3.9 percent year-on-year in January from 3.7 percent. Botswana’s headline inflation is one of the lowest in the region and is within the Bank of Botswana’s medium term objective range of 3-6%. The low inflation rate has been attributed to subdued domestic demand pressures as the country grapples with rising unemployment due to weak job growth prospects, retrenchments, and stagnated wages that have reduced consumers spending power.

The central bank in its last Monetary Policy Committee meeting decided to maintain the bank rate at 5.5 percent after it concluded that the outlook for price stability remains positive. The central bank has been maintaining an accommodative monetary policy marked by reduction in the bank rate, which was prevalent in 2015.

There were two bank rate cuts in 2015, with the first cut in February, which reduced the rate from 7.5 to 6.5 followed by a 50 basis point cut in August. In 2016, the bank slashed the bank rate by another 50 basis point, from 6% to 5.5% in August. Thereafter, it has been maintaining the same rate, as inflation rates continue to be below the bank’s medium term range.

Botswana food prices tend to move in line with South African food prices, sometimes with a lag. Despite the uptick, inflation has only just returned to the lower end of the target band, as weak domestic demand has helped keep inflation lower.

At the same time, government is aiming for some fiscal consolidation and thus keeping a tight rein on the fiscus, which has in turn limited real wage growth – even during periods of low inflation. Given the higher weight to the transport category in the new CPI weights, analysts say they expect inflation to continue on an upward trend, albeit at a slow pace.

Reference: weekendpost.co.bw / MmegiOnline

10 months ago