Bank of Botswana governor, Linah Mohohlo, defiantly stuck to her guns of an annual inflation range at 4-7 percent amid the unstable global and domestic inflationary environment.
Speaking on Tuesday at a press conference to present half-year review of the Monetary Policy Statement (MPS), Mohohlo said efforts to thwart inflation are undermined by Middle East geo-politics which have pushed the prices of crude to new heights.
She said domestic inflation outlook remains still fluid.
However, she said the Bank is bent on arresting the ripple effects that might arise from the situation during the remainder of the second half of the year.
The Bank is wary of the international crude prices and the expected rise in public transport fares and the effects of BTC tariffs re-balancing which are expected to have “second round effects” which might complicate the already unruly inflationary pressures which ran at 12.1 percent by June end.
The cautious outlook blurred whatever little prospects there might have been of a possible Rate cut during the second half of the year.
The report – intended to evaluate financial and economic outlook for the reminder of the year, and assess the need to review the current Monetary Policy stance – stated that inflation rose in the first four months of 2006, due to the increase in administered prices, notably the re-introduction of school fees in government secondary schools and the fuel price increments.
“However, inflation begun to fall and its trend is expected to continue as the effect of the May 2005 devaluation drops out of the inflation calculation, and international inflationary pressure remain benign and demand pressures are contained by a relatively restrictive monetary policy,” the Governor said.
She said the rise in oil price remains a threat to global economic performance.
This comes at a time when the world GDP growth is forecast to rise from 3.3 percent in 2005 to 3.6 percent in 2006.
“There is an upside risk to the general price level as global inflation remains low, partially because inflation expectation continues to be well anchored.
World inflation is estimated at just below 3 percent for the whole of 2006, and this reflects the effect of pre-emptive Monetary Policy action in some of the major economies in a bid to contain inflationary pressure and reinforce productivity improvements,” she said.
MPS mentioned that, in South Africa, output growth is expected to fall moderately from 4.9 percent of 2005 to 4.5 percent in 2006 due to lower rate of growth in both mining and agriculture, although there are signs of recovery in the manufacturing sector.
Nonetheless, CPIX inflation is anticipated to linger within the South African Reserve Bank’s target range of 3-6 percent in the short term, although it is likely to rise to 5 percent in the second half of the year.
While the Rand is expected to depreciate against the major international currencies it is estimated that it will fluctuate minimally vis-├á-vis the Pula, even in the context of a downward crawl of the Pula Exchange Rate, with marginal impact on price developments in Botswana. Overall, it is expected that external inflationary pressure on inflation in Botswana will remain benign.
Nevertheless, both the growth in government expenditure and credit to the private sector in the second half of 2006 are expected to be consistent with the Bank’s annual inflation objective.