Saturday, September 26, 2020

BoB’s new inflation target a tall order

Linah Mohohlo, the Central Bank governor made a disparate appeal last week as she launched a three-year rolling inflation target of 3-to- 6 percent which analysts said Friday that it is a tall order for the bank.

The move by the central bank is a shift from the usual short term targets to a medium to long term target in line with the international practice. However, the central bank, which is currently struggling to contain inflation rate to last year’s targets of 4-to-7 percent with inflation running as high as 8.4 percent as for last month, is faced with a raft of challenges to achieve its new target.

“It is a good move to hear that the central bank is aiming to bring the inflation rate to much lower rates of 3-to-6 percent. But there are lots of challenges which make it very difficult to achieve those targets,” an analyst at Capital Securities, Leutwetse Tumelo said on Friday.

He said with fuel prices running as high as US $ 100 per barrel and salary increases as high as 15 percent, this will present some challenges to the bank.

“There is no way you can avoid a hike in administrative prices if fuel is so high. And the 15 percent salary increase announced will mean that people are going to have a lot of cash, hence, the retail shops will be tempted to increase the prices,” he said.

“We know that everybody wants the highest salary but we have to take into consideration whether the economy will perform at those levels that we would like our salaries to be increased. And we also have to deal with the issue of project implementation, which is lagging behind,” he added.

On the announcement of a salary hike, the central bank appealed to government to ensure that salary rise is within reason since it will trick the private sector to embark on similar exercise in a bid to retain its staff. Government is the largest employer in the country with a labour force of over 200,000 people out of around 375,000 people who are formally employed.

“In the short term, however, the forecast increase in inflation in South African inflation, the continuing high levels of the private sector credit and government expenditure in Botswana and any waged induced increase in demand, will add to domestic inflationary pressures,” the central bank said on Monday.

Further, the bank said the country is faced with other challenges such as high crude oil prices and the electricity outages which are out of its control.
His views were shared by Investec Asset Management analyst, Maungo Lebanna, who said the central bank is faced with some serious challenges.

“The salary increase will result in credit growth because that will result in credit extension from the commercial banks. And that in itself is inflationary and we also have the challenge from high fuel prices,” she said.

In her research note recently, Lebanna said: “our inflation outlook has deteriorated; we previously thought inflation will peak at 8 percent by February, now we see it peaking at around 9 percent,” she said.

She said although domestic inflationary pressures remain muted, there is a likelihood of a spike in administrative prices powered by local suppliers, such as power and housing as they might try to increase charges. So far, the Botswana Power Corporation has indicated that it is likely to raise charges and it is likely to be followed by the Botswana Housing Corporation at the close of the first quarter.

However, Keith Jefferies has increasingly been pessimistic about the inflationary situation saying he expects it to hit double digits before it softens in the second half of the year.
He said the country is faced with electricity outages which will lead to higher administrative prices, high international oil prices, worrying food prices and salary demands.

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