Sunday, September 26, 2021

Bank rate might need revision as inflation lowers

Bank of Botswana this week kept its benchmark interest rate unchanged for an eighth meeting, forecasting inflation will remain above its target.

The bank rate was left at 9.5 percent, Bank of Botswana said in an e-mailed statement this week. The bank has not changed the rate since it was lowered in December 2010.

Inflation, which eased to 7.5 percent in April, will probably remain above the central bank’s target of 3 to 6 percent in the “short term,” according to the statement.

While there are “upside risks” to inflation, slower global growth and a drop in oil prices has contributed to a “positive inflation outlook in the medium term,” the bank said.

Bank of Botswana has observed that non-mining output grew by 7.8 percent while mining output fell by 1.3 percent, yet it remains the economic backbone of the country.

Going forward, it is expected that non-mining GDP will remain below potential in the medium term and will, therefore, moderate inflationary pressures.

Furthermore, it is anticipated that demand and the impact on economic activity will be subdued, thus reflecting sluggish pace of growth in personal incomes and a slowdown in government spending. Domestic output could also be adversely affected by weak demand for exports including the country’s diamonds.

“While there appears to be a surge in credit growth in recent times, it is encouraging that it is mostly supportive of business activity,” Bank of Botswana argues.

Domestic inflation fell for the fourth consecutive month to 7.5 percent in April, from 8 percent in March. The decline in the annual change in prices was evident across most categories of goods and services. Weak domestic demand and the forecast modest external inflationary pressures contribute to the positive inflation outlook in the medium term. However, inflation is expected to remain above Bank of Botswana’s objective range of 3 ÔÇô 6 percent in the short term, reflecting the impact of transient factors, including recent changes in fuel prices. Although inflation is expected to continue to converge to objective range in the medium term, the fear by Bank of Botswana are the upside risks to the inflation outlook which include any “unanticipated large increase in administered prices and government levies.”

However, this is offset by downward risks associated with a likely decrease in international commodity prices such as oil prices and the impact of possible weaker global economic activity.

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