At the first Monetary Policy Committee (MPC) meeting this year, Bank of Botswana governor Moses Pelaelo told the media that the central bank would avoid herd mentality in its decision on interest rates. Although clearly aware of the upside risks of inflation, BoB had just decided to keep interest rates unchanged in order to help stimulate a more dynamic and broad-based recovery of the economy.
Central banks in major nations had indicated that they were tightening policy rates in the future to contain inflation. Closer to home, Namibia and South Africa had instituted rate hikes to counter perceived upside risks to the inflation outlook. Here at home, the Governor had said the projected economic growth of 4.3 percent in 2022 was below growth potential and therefore the output gap remained negative, hence non-inflationary. In other words, inflation was from the supply side and did not warrant a rate hike, according to BoB. To defuse, Botswana’s central bank examined how a 10.6 percent inflation, the highest in 13 years, was arrived at. It indicated that the influence of VAT and administered prices accounted for 7.7 percent of the 10.6 percent while demand considerations accounted for only 2.9 percent. In the absence of VAT and other prices, BoB arrived at a 2.9 percent inflation.
In its view, if it was to increase interest rates against the background of increases in VAT and administered prices, it would not have done anything to inflation. The central bank said it examined core inflation, demand inflation and inflation shocks in its modelling. BoB officials contended that raising interest rates would have no effect on the shock factor; inflation would remain unchanged if the central bank raised interest rates in the face of rising VAT and administered prices. The bank believed that if demand increased, people had more money and the economy grew, BoB would be able to slow it down. But if the bank was to increase interest rates when inflation had nothing to do with, which it cannot control, it would basically be doing nothing. “We do what is appropriate and what our own analytical work suggests should be done”, Pelaelo stated then, remaining firm.
Against this background, he said the bank forecast inflation to start moderating from the second quarter of 2022 and, subject to “current projections remaining valid, revert to within the Bank’s 3 – 6 percent medium-term objective range from the third quarter of 2022”. While there was inflation increase due to indirect taxes (VAT, fuel levy) back in April 2021, that dropped out of the inflation calculation as of April 2022, the expectation being that inflation would ease. The latest available Consumer Price Index (CPI) report shows that March inflation was 10 percent, down from 10.6 percent. The main protagonist has been high fuel prices, which appear to have forced Pelaelo’s hand. Despite the deceleration, FNBB Quantitative Analyst Gomolemo Basele had observed that risks to the headline figure remained tilted to the upside, with the main contributors remaining Transport, which accounted for 5.4 percentage points, Housing and Utilities, which made up 1.3 percentage points, Food and Non-Alcoholic Beverages (+0.9 percentage points) and Miscellaneous Goods and Services (+0.7 percentage points).
As a result of the Russia-Ukraine war, which has led to a drastic increase in oil prices, the Botswana Energy Regulatory Authority (BERA) adjusted local fuel prices upwards on 29 March 2022 . Unleaded petrol 93 increased by P1.26, unleaded petrol 95 increased by P1.25, diesel 50ppm increased by P1.49, and illuminating paraffin by P1.74. While benchmark oil prices have sort of cooled, government senior policy advisor Dr Keith Jefferis sees potential for at least one more fuel price increase to get to cost recovery. “If you look at the information that BERA makes available every month about recovery on slate, the last increase still left us with under-recovery of between P1.50 and P2.00 per litre,” Jefferis said in response to a question from this publication during a Q & A session at an economic forum recently.
He expects inflation to decline but slowly and a lot depending on what will happens on international fuel prices. “We have heard about food prices going up,” said Jefferis. “One point of note is that the increase in international food prices has not yet shown in our inflation range. A lot of these channels are indirect. If you look at the price of food grains, yes, it affects how much we spend on wheat and bread but a lot of it goes into animal feed and that is going to be a very delayed process to reflect in prices for meat, etcetera.”
Overall, Jefferis – who is a former deputy governor of the BoB – agrees that inflation should return to Botswana’s range of 3-6 percent. “But personally, I don’t expect that till middle of next year,” he said. “A lot depends on what happens with global energy prices.” For the renowned economist, it is really because there have been repeated increases in international fuel prices and they feed into inflation until 12 months after they happen. “That’s why I reckon inflation will stay higher for longer,” he pointed out. “Plus, international inflation jumped partly due to energy and food.”
Jefferis observed that the main cause of inflation has been fuel prices with global fuel prices jumping massively. The component jumped about 35 percent year-on-year, in his observation. He said the reason this has impact is that transport has a huge weight in CPI basket. He noted a sub-category called Operation of Personal Transport, which is mostly fuel. This has a weight of about 12 percent. In South Africa, he found that the weight is less than 6 percent, meaning Botswana has double the weight. Essentially, petrol and diesel have double the weight in the CPI basket as compared to South Africa.
At the time Jefferis was saying this, BoB was due to decide on policy direction in its second meeting of the year, and he rightfully predicted a rate hike scenario. At the meeting held on 28 April 2022, the MPC hiked the policy rate by 51 basis points. The decision followed implementation of reforms highlighted in the 2022 Monetary Policy Statement (MPS) aimed at improving Botswana’s monetary policy transmission. The reforms included switching the anchor policy rate from the bank rate to a seven-day Bank of Botswana Certificate (BoBC) yield. This yield, now termed the Monetary Policy Rate (MoPR), was increased from 1.14 percent to 1.65 percent on 28 April 2022.
In Basele’s observation, the decision was made against a backdrop of elevated levels of price growth. While inflation retreated slightly from 10.6 percent year/year in February to 10.0 percent year/year in March, BoB still found that the current high level of inflation is mainly driven by supply-side factors which contribute about 7 percentage points to the prevailing inflation (March 2022). Pelaelo said for a certainty that the next inflation print (April) will be one digit.
But despite the slight disinflation, Basele warned that risks remain tilted to the upside. These risks outlined by the central bank included the possibility of international commodity prices rising beyond current forecasts, the persistence of supply and logistical constraints due to lags in production, the economic and price effects of the ongoing Russia-Ukraine war and the possibility of higher local administered prices. The realisation of some, or all, of these risks will work to keep inflation above the central bank’s 6.0 percent upper objective.
Accordingly, the MPC projected that inflation will, in the short-term, remain above the objective range but continue to trend downward in 2022 and to revert to within the objective range from the first quarter of 2023, compared to previous expectation of Q3 2022. “This is mainly on account of the dissipating impact of the upward adjustment in VAT and administered prices from the inflation calculation,” BoB said in a statement.
In addition to the hike in the MoPR, the MPC set the repo and reverse repo rates at the MoPR (1.65 percent), the Standing Deposit Facility (SDF) at 0.65 percent and the Standing Credit Facility rate at 2.65 percent. Further, as stated in the MPS, BoB sought to allow commercial banks to independently determine their own prime lending rates. In doing so, and in order to facilitate the transition and treatment of pricing of existing financial products and contracts, BoB prescribed that the maximum prime rate be maintained at 5.25 percent, except in the event of an adjustment in the MoPR. Following the MoPR increase from 1.14 percent to 1.65 percent, the maximum prime lending rate has effectively been capped at 5.76 percent. Banks have already alerted customers that PLR will increase to the maximum cap.
BoB officials previously described its stance as “accommodative”. Some economist did not expect a rate hike this year, despite other regional and worldwide economies taking a more hawkish stance, reducing real rates of returns and stemming the tide of capital outflows. Others argued that Botswana’s central bank cannot afford to wait it out, hence it instituted the rate hike.
