Bank of Botswana says Inflationary Outlook Positive

Interest rates are expected to remain favourable as inflation outlook remains positive and economists are predicting an accommodative monetary policy.

Bank of Botswana states in the Monetary Policy statement released on Tuesday March 3 that given the global and domestic economic outlook and inflationary trends, inflation is expected to remain within the 3 – 6 per cent objective range in the short to medium term.

Global outlook forecast for this year is forecast at 3.5 per cent in 2015, slightly higher than the 3.3 per cent in 2014.

Key factors such as unwinding fiscal consolidation and maintenance of accommodative monetary policy as well as quantitative easing by the European Central Bank are expected to support growth.

Further, emerging economies are expected to benefit from removal of structural impediments and strengthening demand.

Inflationary pressures will be restrained in the context of weaker commodity prices and modest world economic activity.Global inflation is forecast to increase slightly from 3.8 per cent in 2014 to 3.9 per cent in 2015.

Inflation remains low in most advanced economies, while deflation continues to be a concern in the euro area and Japan.

Emerging market economies’ inflation is expected to be higher in 2015, but will be restrained by weakening commodity prices particularly for food.

South African inflation is projected to decrease from an average of 6.1 per cent in 2014 to 5.5 per cent in 2015, “thus, average inflation for trading partner countries is forecast to be in the range of 3 – 4 per cent”.

According to the central bank, given that Botswana’s inflation is projected to be close to the lower bound of the medium-term objective range, the nominal effective exchange rate will be constant, at zero rate of crawl in 2015.It is anticipated that the influence of external price developments through imported inflation and changes in the exchange rate on domestic inflation will be modest.

On the local front, the domestic economy is forecast to grow at 4.9 per cent and despite modest expectations from the business community, power supply and water shortages could dampen economic activity.

Government expenditure for 2015/16 is estimated to increase by 5.6 per cent with an overall budget surplus of P1.2 billion.

“The amendments of the Value Added Tax (VAT) that came into effect at the beginning of 2015 extended the range of goods that are zero rated to include additional staple foodstuff.

“The central bank states that this provides some potential for lower prices for those items and this would lead to some short-term reduction in headline inflation.While the decrease could amount to as much as 0.6 percentage points, administrative costs of these changes could erode the magnitude and timing of price cuts.

Further, the resultant savings on food spending could boost domestic demand in other expenditure categories.

It is also anticipated that the 5 percentage increase in alcohol levy will add 0.3 percentage points to inflation in 2015, while the decrease in fuel prices in February 2015 is expected to reduce inflation by 0.93 percentage points.

Domestic demand pressures on inflation will be modest, reflecting restrained growth in personal incomes.

Any increase in salaries for public officers is likely to be modest and therefore not generate significant demand and expectation-related inflationary pressures.

Given prospects for benign external price developments, it is projected that inflation will continue to be within the 3 – 6 per cent medium-term objective range with the possibility of a breach of the lower bound in the short term.

The central bank warns that any substantial upward adjustment in administered prices and government levies beyond current projections presents an upside risks to the inflation outlook.

There are however downside risks arising from weaker domestic activity, falling commodity prices, technological progress, productivity improvements, structural reforms, growing trade and competition that could result in lower inflation than currently projected.

Therefore, the current and prospective developments augur well for accommodative monetary policy in the best interest of productive lending to businesses and households.

The central bank reduced the bank rate by one percentage point to 6.5 per cent last week and a number of economists expect the rate to be low to encourage credit growth and in turn spurn economic development.

Source : BOPA