Wednesday, December 8, 2021

Bank Rate maintained amid surging inflation

The Bank of Botswana (BoB) stuck to its accommodative monetary policy as consumer prices continue to rise, with the central bank reasoning that economic recovery is still low and the latest spike in prices have been due to government actions.

At the meeting held this week, the Monetary Policy Committee (MPC) of the Bank of Botswana decided to maintain the Bank Rate at 3.75 percent, which has prevailed since the last cut in October 2020.

The central bank governor, Moses Pelaelo, said the economy is expected to underperform in the short to medium term and, therefore, not creating any inflationary pressures going forward.

“The projected increase in inflation in the short term is primarily due to transitory supply-side factors that, except for second-round effects and entrenched expectations, for example, through price adjustments by businesses, contractors, property owners and wage negotiations, would not normally attract monetary policy response,” he said.

The latest decision by the central bank comes at time Botswana’s inflation rate hit the highest level in more than a decade as consumer prices continue to soar, mostly driven by government actions as it fights back against the repercussions of the COVID-19 pandemic.

The inflation rate soared to 8.9 percent in July, reaching its highest level since 2009. The latest rise in prices was on the back of cost increases in the transport following numerous fuel price adjustments.

Consumer prices have been on the rise since last year June and breached the central bank’s medium objective range of 3 – 6 percent in May 2021, as the inflation rate ticked to 6.2 percent. In the first six months of 2021, prices rose the most for the transport sector by 13.9 percent, followed by the alcoholic beverages and tobacco segment, which has been facing numerous challenges such as ban on sales and change in legislation , but still managed to see prices jumping by 7.2 percent.

Much of the growth in inflation rate can be traced to government actions as it increased administered prices. The value added tax (VAT) was hiked from 12 percent to 14 percent; an additional P1 per litre fuel levy; upward adjustment in electricity tariffs by 3 percent in 2021 and 4 percent in 2022; the increase in Botswana Housing Corporation (BHC) rentals; the introduction of sugar tax; the announced increase in water tariffs; and most recently the introduction of the plastic levy.

Despite increases in prices, the central bank expects consumer prices to revert within the 3 – 6 percent objective range in the first quarter of 2022. At the moment, Pelaelo said the risks to the inflation outlook are assessed to be skewed to the upside.

“These risks include the potential for increase in international commodity prices beyond current forecasts; persistence of supply and logistics constraints due to possible maintenance of travel restrictions and lockdowns; and domestically-based risk factors relating to second-round effects of the recent increases in administered prices and inflation expectations that could lead to generalised higher prices.”

However, the risks are moderated by the possibility of weak domestic and global economic activity, with a likely further dampening effect on productivity due to periodic lockdowns and other forms of restrictions in response to the emergence of new COVID-19 variants.

A slow rollout of vaccines resulting in the continuance of weak economic activity and the possible decline in international commodity prices could also result in lower inflation, as would capacity constraints in implementing the Economic Recovery Transformation Program initiatives,” the governor said.

RELATED STORIES

Read this week's paper