BANK OF BOTSWANA WORRIED ABOUT RISING INFLATION

Despite declining numbers of inflation in the past months, Bank of Botswana has warned consumers prices will remain higher than its targeted range in the short term.

During the launch of the Monetary Policy Statement for 2013 the bank said thatgiven the low domestic demand pressures and benign external price developments, the outlook for inflation in Botswana was positive, despite short-term price developments contributing to a higher level of inflation relative to the objective range of 3 – 6 percent.

However, the bank is saying the prices will be under pressure in the coming months although it will go down before the end of the year.

“Looking ahead, inflation is projected to remain above the medium-term objective range in the short term due to the residual effects of the increase in administered prices in 2012,” said Linah Mohohlo, Governor of Bank of Botswana during the presentation of the MPS.

“Upside risks to the inflation outlook include any substantial increase in administered prices and government levies, as well as international food 2 and oil 3 prices beyond current projections.

This could, however, be mitigated by the downside risks associated with the envisaged weak global economic performance.”

Mohohlo said inflation is projected to converge to the 3 – 6 percent medium-term objective range later in the year (2013), in view of low domestic demand and benign foreign inflationary pressures associated with below-trend domestic and global economic activity.

As anticipated in the 2012 MPS, domestic inflation maintained a downward trend during the year; it fell from 9.2 percent in December 2011 to 7.4 percent in December 2012.

However, the projected convergence to the 3 – 6 percent objective range was not realised due to the unanticipated increase in administered prices and government levies.

Mohohlo said upside risks to the inflation outlook include any substantial increase in administered prices and government levies, as well as international food 2 and oil 3 prices beyond current projections.

“This could, however, be mitigated by the downside risks associated with the envisaged weak global economic performance.”

The Bank’s monetary policy objective is to achieve price stability, which is defined

as a sustainable level of inflation that is within the medium-term objective range of 3

– 6 percent.

Bank of Botswana noted that the persistent inflation above the medium term objective range presents a challenge for monetary policy implementation, as inflation expectations may have an upward bias.

Inflation eased steadily in Botswana in the first eight months of the year, in line with the global trend.

After reaching a low of 6.6 percent in August 2012, it increased due to the higher alcohol levy and the increase in administered prices.

These added nearly 2 percentage points to headline inflation, of which 1.3 percent was on account of higher fuel prices.

Nevertheless, for the year as a whole, inflation fell from 9.2 percent in 2011 to 7.4 percent in December 2012.

“Therefore, the formulation and implementation of monetary policy will need to take into account the impact of short-term price developments on inflation expectations, which could potentially feed into medium-term expectations and the level of inflation,” Mohohlo said.

In pursuit of the objective of price stability, the Bank uses interest rates and open market operations to affect demand conditions in the economy and, ultimately, the rate of increase in prices.

The Bank has kept interest rates at 9.5 percent.