- Strong base effects could lead to inflation dropping below BoB’s lower bound range
- June inflation forecast to drop to 4.8 percent
- BoB projects economy operating below full capacity and obviating demand-driven inflationary pressures
As inflation continues to drop and having recently receded back within the Bank of Botswana’s medium-term objective range of 3 – 6 percent, it is anticipated that it could drop even below the Bank of Botswana’s 3 percent lower bound.
The annual inflation rate was 5.7 percent in May 2023, compared to 7.9 percent in April 2023, registering a drop of 2.2 percentage points. According to data provided by Statistics Botswana, contributing substantially to the annual inflation rate in May 2023 were Food & Non-Alcoholic Beverages (1.9 percent), Transport (1.0 percent), and Miscellaneous Goods & Services (0.9 percent). According to Kgori Capital Investment Analyst, Kitso Mokhurutshe, the decline in inflation was, again, mainly driven by significant base effects.
He said May 2022, the base month, experienced significant fuel price increases of 148t, 154t, 274t, and 206t for petrol 93, petrol 95, diesel, and illuminating paraffin, respectively “Inflation is expected to experience another decline in June 2023, albeit of a smaller magnitude than in the previous two months,” said Mokhurutshe. Without any new adjustments, Kgori Capital estimates the June inflation to drop to 4.8 percent. Based on its model, Kgori had anticipated the May 2023 inflation to be 5.9 percent.
Providing an outlook, Mokhurutshe noted inflation will continue to decline to a trough close to BoB’s 3 percent lower bound in July 2023. “It will then rise above the 6 percent upper bound by Q4 2023 before sustainably trending within the 3-6 percent range in Q2 2024,” he explained. He noted that there is a real possibility that inflation could drop below BoB’s 3 percent lower bound in Q3 due to strong base effects.
At a recent Monetary Policy Committee (MPC) media briefing, BoB governor Moses Pelaelo told journalists that MPC projects that, going forward, inflation will remain within the objective range into the medium-term. He said the projected decrease in inflation is due to, among others, the absence of upward adjustment of administered prices, subdued domestic demand, projected appreciation of the Pula against the South African Rand and zero rating of a select number of items from Value Added Tax (VAT).
He, however, warned that inflation could be higher than projected in the event international commodity prices increased beyond current forecasts, persistence of supply and logistical constraints, as well as reversal of global economic integration (geo-economic fragmentation). “Furthermore, any possible upward adjustment of administered prices that is not factored into the current projection may also lead to higher inflation,” said the Governor.
He added that these risks are, however, offset by the possibility of weak domestic and global economic activity, possible disinflationary effects of higher monetary policy rates globally, stronger appreciation of the Pula against the South African Rand than projected, as well as restrained international commodity prices. Pelaelo stated that the MPC projects that in addition to the dissipating impact of administered prices, the economy will operate below full capacity in the short term and, therefore, not generate demand-driven inflationary pressures. “Thus, inflation is forecast to remain within the objective range into the medium term,” he said.
