Central Bank said on Friday the medium term outlook for inflation is positive as it left the Ban Rate steady despite numbers going up for the past two months. This is also in line with expectation from the market.
With this positive outlook, Bank of Botswana left the benchmark rates at 10 percent.
“It is, therefore, expected that inflation will fall within the 3 ÔÇô 6 percent objective range in the second half of 2011. It is further projected that, following contraction in 2009, the domestic economy will grow at a moderate rate in the short to medium term, with below trend output,” the Bank said.
There were worries in the last two months as Value Added Tax (VAT) increase of 2 percent and electricity tariffs that went up 30 percent led to an upward movement in inflation.
Inflation as measured by the Consumer Price Index (CPI) continued on an upward trend in May rising to 7.8 percent year-on-year from 7.1 percent year-on-year in April.
However, analysts said the Bank’s Monetary Policy Committee will view the two as events and will not influence the decision to hike rates.
Inflation increased from around the upper end of the 3 ÔÇô 6 percent objective range in the first quarter of 2010 to 7.1 percent and 7.8 percent in April and May 2010, respectively.
The generalised rise in the rate of price changes in April was due to the increase in VAT from 10 percent to 12 percent, while the higher inflation in May was mostly the result of the increase in electricity tariffs.
“Overall, underlying inflation is restrained due to benign external price pressures and subdued domestic demand. However, the Bank is concerned that expectations of high inflation could be entrenched. It is, therefore, important to emphasise that when the effects of transitory factors are excluded, inflation would fall within the objective range,” observed the Bank.
Bank of Botswana added that although exporting sectors will benefit from sustained recovery in world demand, growth of the domestic economy will be moderated due to reduced government spending.
Moreover, it is anticipated that demand and its impact on economic activity will be subdued, thus reflecting public sector wage freeze, and the increase in VAT, administered prices and other levies.
“Nevertheless, the loosening of monetary policy in 2009 continues to be supportive of economic activity and will contribute to a narrowing of the output gap in the medium term”, the Bank said.
“Overall, the low domestic demand pressures, together with the projected benign external inflationary pressures, contribute to the positive inflation outlook in the medium term.”
“In the short term, inflation is projected to rise further due to the May 2010 increase in fuel prices. This adds to the impact of the increase in VAT and electricity tariffs.”
By not adjusting the Bank Rate, BoB is of the view that in the medium term, inflation is expected to be within the objective range on a sustained basis from the second half of 2011.
However, the risks to this outlook include further upward adjustment in administered prices and government levies. It is anticipated that the Pula exchange rate will be largely stable with minimal effect on domestic price developments.
“The current state of the economy and the assumptions on both the domestic and external economic outlook, as well as the inflation forecast, suggest that maintaining the prevailing level of interest rates is consistent with the achievement of the Bank’s 3 ÔÇô 6 percent inflation objective in the medium term.”