The national year-on-year inflation continued trending down last month at the back of lower energy and food costs sending the markets into anticipation that inflation will hit a single digit before the end of year.
Data from the Central Statistics Office (CSO) released Monday showed that in the month of February, the inflation rate stood at 11.7 percent, down by 1.1 percentage points from 12.8 percent in January 2009.
Observers say the falling numbers are in line with expectations as culprits: food and energy prices, have been stabilising.
Stockbrokers Botswana analyst, Pulafela Isaacs, sees the downward trend in inflation, which has been prevalent since the last quarter of 2008, originating from the drop in oil prices in the international markets.
“We have since seen oil prices fall to around US$ 40 per barrel. What followed was a reduction in petroleum pump prices and the reduction in public transport fares,” Isaacs pointed out.
However, as usual, alcoholic beverages, tobacco & narcotics group nearly spoilt the party as the index registered an increase of 0.8 percent.
The discipline oriented government in November 2008 introduced the 30% levy on alcohol that resulted in a temporary rise in inflation. At that time, inflation went up by 1.9 percentage points to 15.0% before dropping again to 13.7% the following month.
“The effect of the levy will wash out as the net effects of other inflation constituents overcome it. We must appreciate that the magnitude of the levy was relatively high, hence the significant rise within a short space of time,” Isaacs added.
He added that given the current turmoil in the world economy, where one anticipates a fall in demand as a result of a possible reduction in disposable income, the belief is that inflation ‘may hit a single digit before the end of the year’.
Investec forecasts inflation to continue falling down to close the year at 7.6 percent.
“Falling numbers of inflation are definitely sustainable and is being helped by the fact that the disinflation is being supported by declining inflation in South Africa and other trading partners,” said Bakang Seretse, Fund Manager at Investec.
Seretse added that the 30 percent alcohol levy should wash from the system, although it may take some time from 6 months to a year.
Investec say they are going to see more interest rates cuts than previous, with a forecast a bank rate of 12% by year end with an outside chance that the bank rate could be cut to 11%.
“Inflation is coming down, so it gives Bank of Botswana to cut rates aggressively. We have also been seeing maturity from Bank of Botswana in their policy setting,” said Seretse.
“Bank of Botswana is no longer only looking at the fear that Batswana are going to indebt themselves with a cut in rates. They are more concerned about not risking the economy. Their policy setting is now geared towards stimulating non-inflation growth,” he added.
Bank of Botswana last month lowered cost of borrowing by 1 percent to stimulate economic activity at a time when the credit crunch wave was sweeping across major economies.
However, Isaacs says, “We believe that there may not be any rate reduction in the immediate short term given that unnecessary rate cuts may be inflationary and defeat the purpose of the initial rate cuts.”
The CSO data showed that the urban villages’ inflation rate registered a decrease of 0.6 of a percentage point, from 12.5 in January to 11.9 in February while the rural villages’ inflation rate dropped by 1.6 percentage points from 16.3 percent in January to 14.7 percent in February.
On the other hand, the cities and towns’ inflation rate also went down by 1.0 percentage point from 11.5 percent in January to 10.5 percent in February.