Tuesday, January 19, 2021

Analysts warn of robust inflation hike in the second half of 2008

Investec Asset Management of Botswana raised warning bells about the impending upcoming inflation reading which said they should be higher than expected, blaming the whole spike on the energy and food crisis that have afflicted the world.

The forecast by Investec comes at a time when the Bank of Botswana has just tempered with interest rates by adjusting them by 0.5 percent on Thursday evening in a bid to thwart the spiralling inflation rate.

Although the move caught the markets by surprise, they were not shocked by the developments since inflation has been on the rise since the beginning of the fourth quarter of last year.
“The main factors (Food & Oil) that have driven inflation higher over the last couple of months have not abated, in fact, one can argue that they have continued to deteriorate during the month of June.

“The CPI reading of 12.1% was significantly higher than our forecast of 11.5% with food inflation the main culprit. The view we held┬á for the past year on domestic fuel prices was that the subsidies were not sustainable in the face of rising oil prices,” Mokgatla Madisha of Investec’s Investment Management said on Friday.
However, he said the surprise has been the speed with which the fuel subsidies have been withdrawn.

“You will have noticed that the increases in fuel prices this month are somewhat higher than what the Department of Mining and Energy requested. We will see very high readings over the next two months as the fuel and electricity price increase come through,” he said, adding that the National Electricity Regulator of South Africa, NERSA, had allowed ESKOM to increase rates by another 20% effective 1 July.

Botswana, like other southern African countries, draws most of its electricity from South Africa’s power corporation, which is currently battling with damaged power plants and the depletion of its coal resources. The move has sent the region in constant black-outs as the national corporation embarked on load-shedding.

However, analysts in Gaborone this week raised concern that the Bank of Botswana is embarking on a fruitless exercise by punishing the local market with high interest rates while factors which are pushing up the inflation rate are outside the control of the country.
“The main problems are energy and food shortages, over which Botswana does not have any control. I think it is unfair to be resorting to interest rates hikes which will ultimately push everybody into debt trap,” one analyst said.

His views were supported by Madisha who said that although we have not yet seen the full impact of price increases as on the first, “on the food front”, there are some dark clouds which will be associated with climate changes that have affected North America and China.
“Secondly international corn prices have increased significantly as a result of flood damage to the USA crop, prices are up circa 20% monthly to date,” he said.

3) We don’t forecast oil prices but believe that current prices are a reflection of supply/demand dynamics. It is import to remember that up until recently more than a 3rd of the world’s population (China, India, Indonesia and most of the Middle East) had subsidised petrol, meaning that they were not experiencing the kind of prices that we are.

4) On whether there will be further rate increases it is hard to say the Bank is not very transparent in its policy setting. The Bank has to be seen to be committed to fighting inflation for the sake of anchoring expectations. But almost all the inflation is imported so there is very little that raising rates can do to reduce the kind of inflation currently being experienced. Chances are they will pause and see how things develop over the next four months or so.

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