Inflation trended down for two consecutive months in July, but analysts believe the Central Bank will keep its benchmark rate steady for the remainder of the year unless something drastic happens to the economy.
The Central Statistics Office (CSO) said on its monthly Consumer Price Index (CPI) update that during July 2010, national year-on-year inflation rate softened to 7.0 percent, down by 0.7 of a percentage point from 7.7 percent in June 2010.
Investec said although the July CPI surprised on the downside yet again it is likely to remain outside of the Bank of Botswana’s 3-6 percent target range throughout 2010.
“The lower-than-forecast July CPI reading pulls our year-end inflation rate slightly lower from 8.5 percent to 8.4 percent,” said Carol-Jean Harward, an Investment Analyst at Investec.
“We expect CPI to be trending mildly higher in the last months of 2010 to early 2011, as a result of the second-round effects of electricity tariff and value-added tax increases, but this may be partly offset by continued deflation in food prices and a small cut in petrol prices,” she added.
However, Investec expects inflation to reach the upper end of the target range in the second half of 2011.
June 2010, national year-on-year inflation rate stood at 7.7 percent, down by 0.1 of a percentage point from 7.8 percent in May 2010.
“Going forward, inflation is expected to weaken further to levels between 5 percent and 6.8 percent in the coming months as the effect of the increases in VAT, electricity and fuel prices dissipates,” said Garry Guma, an analyst with Motswedi Securities.
“The reduction in local fuel prices, which was effected on Monday, is further expected to dampen inflationary pressures,” he added.
Despite the falling figures, both analysts are of the view the Bank of Botswana (BoB) will not temper with rates at its Monetary Policy Committee (MPC) meeting in two weeks.
“As a result, the Central Bank Monetary Policy Committee is widely expected to leave interest rates unchanged at its next meeting, which is expected towards the end of this month in line with weaker inflation expectations,” said Guma.
“We continue to believe that the MPC is likely to keep the bank rate unchanged at 10 percent throughout the remainder of the year. However, should there be further deterioration in the non-mining GDP and the global growth outlook, the likelihood of a rate cut will increase,” added Harward.
The CSO update showed that the cities and towns’ inflation rate went down by 0.6 of a percentage point from 8.5 percent in June to 7.9 percent in July.
On the other hand, the urban villages’ inflation rate was 6.4 percent, down from the June rate of 7.0 percent by 0.6 of a percentage point.
The rural villages’ inflation rate registered a decrease of 0.8 of a percentage point, from 7.0 percent in June to 6.2 percent in July.
The urban villages’ index went up by 0.5 percent, from 137.0 to 137.6 between the two months.
Two group indices recorded changes of at least 1.0 percent between June and July ÔÇô Recreation & Culture (3.7 percent) and Clothing & Footwear (1.2 percent).
