Projected Appreciation of Pula Against Rand to Ease Inflation &#8211; BoB

BoB expects inflation to fall within objective range of 3-6% in Q2 2024 Lower fuel prices, modest domestic demand among factors identified BoB says weak economy in SA is leading to weakening of the Rand Appreciation of the Pula against the South African Rand is one of the factors contributing towards the downward revision of the inflation forecast, the Bank of Botswana (BoB) has noted. According to projections of BoB’s Monetary Policy Committee (MPC), while it will fluctuate, inflation will trend downwards and fall within the central bank’s objective range of 3-6 percent in the second quarter of 2024. [ihc-hide-content ihc_mb_type="show" ihc_mb_who="1,2,3,4" ihc_mb_template="3" ] Addressing journalists in Gaborone recently, Governor Moses Pelaelo said the projected decrease in inflation in the medium term is due to the dissipating impact of the earlier increases in administered prices (base effects), lower fuel prices, modest domestic demand, current monetary policy posture, increase in interest rates and constrained supply of credit globally (tightening financial conditions), expected decrease in global inflation and international commodity prices, as well as the projected appreciation of the Pula against the South African Rand. Deputy BoB Governor Dr Kealeboga Masalila explained that the Pula is expected to appreciate against the ZAR because of the state of the economy in that country. “The South African economy is currently weak and does not generate much in terms of production and exports, which leads to weakening of the currency,” he said. Another fundamental issue that he said he expects will weaken the Rand is the global increase in interest rates, especially in advanced economies. “This means the attraction for the major currencies increases because of high interest rates,” Masalila noted. “Therefore, given the demand for these currencies against the Rand, it means the Rand will weaken.” Along with the appreciation of the Pula gainst the Rand, another external factor that the central bank has considered in the downward revision of its inflation forecast is the downward revision of international commodity prices. Most notably, the bank expects fuel prices to drop significantly due to lower demand for oil. Nonetheless, Governor Pelaelo indicated that inflation could be even higher than projected because of the likelihood of an increase in international commodity prices beyond current forecasts, persistence of supply and logistical constraints, as well as reversal of global economic integration (geoeconomic fragmentation) that may lead to higher inflation. Domestically, he said, the risks of higher inflation include a possible adjustment in administered prices that are not factored in the current projection, and entrenched expectations for higher inflation, any realised upward pressure on wages, and any, overshooting of prices beyond what is consistent with the reversion of value added tax to 14 percent effective 1 st April 2023. “These risks are, however, moderated by the possibility of weak domestic and global economic activity, possible disinflationary effects of tighter monetary policy globally, as well as restrained international commodity prices,” said Pelaelo. In April, the International Monetary Fund (IMF) increased its inflation forecast for 2023 from 6.6 percent to 7 percent. Similarly, the latest survey of chief economists also registers a gloomier inflation outlook compared to January, with a marked uptick across all regions in the proportion of respondents expecting high, and in some cases very high, inflation this year. The World Economic Forum’s chief economists’ outlook raised inflation expectations from moderate to high and very high inflation, most notably in sub-Saharan Africa with 74 percent of the respondents expecting high to very high inflation in the region. China remains an outlier, with only a small proportion of respondents (14 percent) expecting high inflation this year, albeit up from 5 percent in January. “One factor to watch is the possibility that China’s reopening will add to inflation pressures elsewhere, particularly if outbound tourism picks up,” noted the chief economists in their outlook report. [/ihc-hide-content]

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Projected Appreciation of Pula Against Rand to Ease Inflation – BoB

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