Sunday, September 19, 2021

Inflation at record lows but prices soar

Consumer prices have been increasing at a lower pace in Botswana, but this could change this year as government raises the value added tax (VAT) and upward adjustments in service charges and fees.

The annual inflation rate continued its three-year decline, with the growth rate averaging 1.89 percent last year, down from 2019’s average of 2.79 percent, 2018’s 2.2 percent and 3.3 percent in 2017. The inflation rate has been lagging the lower bound of the Bank of Botswana (BoB) inflation objective range of 3 – 6 percent.

While overall prices might have risen by only 1.89 percent in 2020, the numbers do not truly reflect the reality of rising prices amid a pandemic.

Costs have increased for basic needs and commonly used services faster than what the inflation rate reflects. The country’s consumer price index (CPI), is made up of twelve group indices, intended to represent average consumer patterns

In the past 12 months, the second largest component of the index, Housing, water, electricity, gas, and other fuels recorded a 6.9 percent increase in prices; the Alcohol beverages and tobacco prices grew by 6.5 percent; Education costs were up 4.7 percent; Food  and non-alcoholic beverages rose by 3.6 percent while the Clothing and footwear index prices were up by 2.8 percent.

While other group indices registered increases in prices, the fall in consumer prices in 2020 has largely been down to changes in administered prices. The government reduced fuel costs twice between April and June. The transport sector is the largest component of the CPI and as such, any price movements within the transport index usually dictates the movement of the country’s  inflation rate.

Though the central bank usually touts price stability as their main mandate, the bank has in the past shown concern over Botswana’s low inflation environment.

This attributed to weakened domestic demand as wages remain stagnated while unemployment continues to rise, all contributing to restrained consumption. Policy makers at the Finance Ministry have echoed similar sentiments in the ministry’s maiden economic quarterly report released in September.

“Although low inflation makes costs, wages and prices predictable and increased rates of return for savers, in this instance falling inflation is triggered by suppressed demand, and this is a sign of a depressed economy, mainly caused by the COVID-19 pandemic,” they noted in the report.

With the inflation outlook  below the medium-term inflation objective of 3-6 percent, it provides a scope for an accommodative monetary policy in order to boost economic activity, according to the government economists. The central bank has assumed the accommodative monetary policy stance for over a decade following the 2008 global financial crisis.

BoB has been cutting the rate since it reached an all-time high of 15.5 percent in June 2008. In the last Monetary Policy Committee (MPC) held in December, the committee led by the central bank governor maintained the benchmark rate at 3.75 percent, which was reached in October making the current bank rate the lowest on record.

In general, as interest rates are reduced, more people are able to borrow more money. The result is that consumers have more money to spend, causing the economy to grow and inflation to increase.

Despite the lower bank rates in the past, the stubbornly low inflation environment has given rise to the debate over the effectiveness of the central bank’s accommodative policy in stimulating domestic demand and jumpstarting the economy.

However, the central bank is confident that inflation is expected to revert to within the 3 – 6 percent objective range in the third quarter of 2021, influenced by the accommodative policy stance and the stimulus to activity derived from government economic recovery and transformation plan (ERTP).

In addition, inflation  might get a push from the likely increase in international commodity prices, the expected upward adjustment in electricity tariffs, as well as increases  in fuel prices in the later part of the year.

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