Monetary policy makers at the Bank of Botswana have said that a substantial wage adjustment could change the outlook of domestic inflation, currently viewed as ‘positive’.
The BOB researchers are of the view that although moderate domestic demand and the forecast are benign, external price developments contribute to the positive inflation outlook in the medium term. The outlook could be adversely affected by any unanticipated large increase in administered prices.
The Bank of Botswana caution comes hardly a few days after the bargaining council, consisting of senior government officials, public servants, and trade unions failed to reach an agreement on a proposed adjustment of government workers’ wages.
Government has reportedly proposed a 4 percent hike for the 2014/15 financial year which the trade unions are said to have rejected.
At the same time, the Bank of Botswana Monetary Policy Committee, headed by the governor, Linah Mohohlo, last week warned that an increase in demand and inflation expectations arising from a substantial wage adjustment could change the outlook for the domestic inflation.
It took over 5 years before domestic inflation went down to Bank of Botswana’s desired level. In 2011, 4 years after setting the target, headline consumer price inflation was still above the medium term objective range of 3 ÔÇô 6 percent throughout that year after increasing from 7.4 percent in December 2010 to 9.2 percent in December 2011.
The annual increase in the cost of fuel in that year added approximately 1.9 percent points to inflation while administered prices added approximately 2.7 percentage points.
However, subdued prices for other commodities sub groups such as a 5.4 percent reduction in the cost of communication in 2011, held down inflation. The average national inflation rate went down from 8.5 percent in 2011 to 7.5 percent by the end of 2012.
The Statistics Botswana (SB) data indicates that after reaching a low of 6.6 percent in August 2012, domestic inflation increased to 7.4 percent by the end of that year.
The rise was attributed to the higher alcohol levy and the increase in administered prices that were implemented during 2012.
Fast forward to 2013, domestic inflation became very tame at a constant rate of 4.1 percent between November and December 2013 thus being within the Bank’s objective range of 3 ÔÇô 6 percent.
The ‘ambitious’ goal of attaining an inflation rate in the range of 3 ÔÇô 6 percent was set back in 2007 when the central bank changed from setting annual objectives to medium term objectives.