- BoB behind the curve
- Fitch forecasts policy rate to hit 3.65% in H2 2022, 4.15% in 2023
- Fed’s hawkish stance encouraging policy tightening
- BoB inflation projections may be too low – economists
- Inflation will likely not return to target band in 2023 – Fitch
Fitch Solutions has forecast that the Bank of Botswana (BoB) will hike the Monetary Policy Rate (MoPR) by 150 basis points (bps) to 3.65 percent in the second half of 2022.
Risks to the research firm’s interest rate forecasts are mixed but weighted to the upside. Fitch Solutions projects that higher-than-expected inflation in the months leading up to the Monetary Policy Committee (MPC) meeting on August 25 and that the central bank could hike rates more aggressively over the remainder of 2022.
“In addition, more significant tightening by central banks in developed markets and/or South Africa could also result in the BoB adopting a more hawkish bias,” Fitch wrote in a report released last week soon after the MPC raised the MoPR by 50 bps to 2.15 percent.
This was the second successive rate hike this year. The MPC held the interest rate at its February meeting but hiked by 51bps at its April meeting. It stated that the rate hike was needed to maintain “price stability in the medium-term” and to “moderate second round effects and entrenched expectations for high inflation”. Fitch notes that the hike is in line with the IMF’s recommendation to further tighten monetary policy in order to ease inflationary pressures in Botswana.
“We expect the BoB will continue raising rates in its coming meetings to combat still elevated price pressures,” Fitch Solutions says. While consumer price inflation eased slightly in March and April, May’s inflation print climbed to 11.9 percent, the highest rate since January 2009 and well above the BoB’s 3 to 6 percent target range. Data published by Statistics Botswana shows that elevated energy prices are driving the headline figure, with transport and housing costs having increased by 31.5 percent and 8.0 percent y-o-y respectively in May.
Fitch found that rapidly rising transport costs were primarily the result of the petrol and diesel price increases by the Botswana Energy Regulatory Authority (BERA) on May 13 and an increase in public transport fares on May 20. In the months ahead, “we expect that elevated oil prices will continue to inflate transport and electricity bills in Botswana, with our Oil & Gas team projecting the price of Brent crude to average USD100.0/barrel (/bbl) over 2022, 40.9 percent higher than in 2021, given the war in Ukraine” Fitch says. “Indeed, BERA has announced that the fuel price increase in May was still below the level required for local fuel suppliers to break even, indicating that more upward adjustments to petrol and diesel prices are likely.”
Taking this into account, Fitch has revised up its average 2022 inflation forecast for Botswana to 11.3 percent from 8.3 percent previously. This is versus the MPC’s average of 11.1 percent. BoB found that the current high level of inflation is mainly driven by supply-side factors, which contribute approximately 6.1 percentage points to the prevailing inflation (May 2022). The MPC projects that inflation will, in the short-term, remain above the objective range but trend downward from the fourth quarter of 2022 and fall within the medium-term objective range of 3 – 6 percent from the third quarter of 2023. “This represents a revision of the trajectory for inflation from the April forecast, influenced by a subsequent increase in fuel prices and transport fares,” BoB said in a statement, adding that the projected decrease in inflation in the medium-term is due to dissipating impact of earlier increase in administered prices.
But Fitch does not believe that consumer price inflation will revert back to the central bank’s target range over 2023, incentivising BoB to maintain a hawkish bias. While global commodity prices will ease in 2023, Fitch argues that they will remain elevated by historical standards due to ongoing geopolitical tensions and pandemic-related uncertainty. “Our Oil & Gas team forecasts the price of Brent crude to average USD90.0/bbl in 2023, 10.0 percent lower than in 2022, but above the 10- year pre-pandemic average of USD80.1/bbl.” Similarly, while Fitch’s Agribusiness team forecasts that the price of wheat will fall by 13.0 percent in 2023 to USc800.0/bushel, the researchers argue that this remains well above the 2010-2019 average of USc572.3/bushel.
An important issue that RMB has also noted is that India has instituted a ban on its wheat exports, a move that has sent global wheat prices higher amid an already tepid soft-commodity environment. The recent ban came on the back of concerns over wheat security in India, given a poorer harvest season as a result of extreme weather conditions. “Meanwhile, short-term unintended consequences of import restrictions – that have resulted in price increases owing to shortage in supplies – will continue to drive up food prices,” Gomolemo Basele, economist at FNBB said in a note. In May, prices of food and non-alcoholic beverages ticked up by 2.6 percent m/m owing to higher prices for oils and fats (+7.1 percent m/m), vegetables (+6.7 percent m/m) as well as bread and cereal (+3.2 percent m/m). Thus, while Fitch believes that inflation in Botswana will ease in 2023, it expects it to remain above the target range at an average of 7.0 percent. As a result, Fitch expects BoB’s tightening cycle to spill over into 2023, with the central bank expected to raise the Monetary Policy Rate by another 50bps to 4.15 percent.
“The US Federal Reserve’s hawkish stance will encourage further monetary tightening over H222,” says Fitch. Reuters reported last week that “Fed hiked the federal funds rate by three-quarters of a percentage point, its largest rate increase since 1994, after official data just a few days earlier showed inflation unexpectedly rose despite expectations it had peaked”. Fitch’s Global team forecasts that the Federal Reserve will hike the policy rate by another 200bps (totalling 350bp in 2022) to 3.75 percent by end-2022, consistent with a global trend of moving away from accommodative monetary policy in order to cool inflation. “This will encourage the BoB to maintain its hawkish bias in order to protect the interest rate differential, reduce capital outflows and ease pressure on the pula.”
That said, the research unit expects moderating economic conditions will limit the appetite for tightening beyond the 3.65 percent it currently forecasts. The experts cautioned that rising inflationary pressures will cap household consumption growth and weigh on business profit margins over the coming months. Furthermore, Fitch believes that slower growth in China (its Asia team has revised down its 2022 Chinese growth forecast to 3.6 percent from 4.5 percent previously) on the back of rolling COVID-19 lockdowns is likely to dampen demand for diamonds. With China being one of world’s largest diamond consumers, the firm believes this dynamic will weigh on Botswana’s exports over the coming months (diamonds account for roughly 90.0 percent of Botswana’s total exports). “Taking this into account, we forecast real GDP growth in Botswana to come in at 4.6 percent in 2022, slightly below the 10-year pre-pandemic average of 4.8 percent,” says Fitch.
The IMF recently reduced the outlook for Botswana for 2022 to around 4.3 percent from its initial 4.7 percent. On the downside, Fitch says economic growth that surprises to the downside would likely prompt BoB to tighten monetary policy less aggressively in order to stimulate economic activity. Economists observed that BoB is a bit behind the curve with the hiking. Inflation has arguably caught everyone off guard. BoB forecast revisions were large though and they have been revising up at all their MPC meetings this year. Many experts are trying to rework their forecasts which they say are likely going to be much higher than BoB’s.
In other words, some economist argue that BoB’s inflation projections are too low. Upside risks are becoming more and more pronounced. SA CPI also just came outm shockingly tilted to the upside compared to the consensus view. SA’s headline inflation was 6.5 percent y/y in May, up from 5.9 percent in April. “This outcome was a shock our consensus expectation of 6.0 percent and 6.1 percent, respectively,” Koketso Mano, economist at FNB SA said in a flash note released to SA market this week. “The upside surprise from today’s data will likely result in upward adjustments to annual inflation projections and place further upward pressure on local interest rates,” Fitch notes.
SA began rate hikes in 2021 to counter perceived upside risks to the inflation outlook. Egypt’s central bank last increased interest rates by 300bps as a way of tackling inflation and preventing capital outflows from the market. RMB maintained its view that interest rates are likely still going to increase by another 200bps before the end of the year – likely staggered in two 100bps hikes. At its last meeting, the Bank of Ghana opted to raise the main policy rate by a further 200bps, from 17 percent to 19 percent. The move was largely anticipated given the rising inflationary pressures in the economy. RMB’s base case is for an additional 150bps before the end of the year.
In line with its base case scenario, Kenya MPC opted to hike rates by 50bps, raising the benchmark interest rate from 7.0 percent to 7.5 percent. The narrative for higher interest rates is similar to that of other economies and can be summarised as: rising global uncertainty on account of the Russia-Ukraine war; higher global interest rates and higher global inflation. “We maintain our view that the MPC will intervene with an additional 100bp of rate hikes before the end of the year,” RMB economist Daniel Kavishe said. “We expect it to stagger the increase, but this will largely depend on the prevailing conditions at the time.”
The Central Bank of Nigeria’s (CBN) MPC recently hiked interest rates by 150bps, citing concerns around the upward trend in inflation. RMB had expected the CBN to only start hiking in the second half of this year. However, with global interest rates increasing at a faster pace and inflation remaining high, the committee opted to hike in May by raising the main policy rate to 13.0 percent. In neighbouring Namibia, the MPC opted to frontload hikes when it increased benchmark rates by 250bps. The monetary policy committee of Mozambique also opted to hike interest rates by 200bp, a sign that the central bank is concerned about inflation.