September inflation drop narrows gap to BoB target ahead of MPC

Domestic inflation has dropped to its six-month low in September, narrowing the gap to the Bank of Botswana’s objective range ahead of the next meeting of its Monetary Policy Committee, which has sought to balance support for economic activity with managing inflation expectations.

According to figures recently released by Statistics Botswana, annual inflation slowed to 7.8 percent from 9.3 percent in August - a decline which reduced the gap to the upper end of the central bank’s 3 - 6 percent objective range to 1.8 percentage points, from 3.3 points a month earlier.

The reading came in as the lowest since March, when inflation stood at 4.2 percent, before higher fuel prices and other charges pushed it into double digits. It comes ahead of the MPC’s October 29 meeting, following its decision in August to maintain the monetary policy rate at 5.5 percent.

“The MPC judged that the outlook warranted maintaining a policy stance that balanced support for economic activity with the need to manage inflation expectations,” the Bank said in its August Monetary Policy Report.

September’s figures show progress towards the inflation objective, although the slowdown broadly matches the path the Bank had already anticipated. Inflation averaged approximately 8.8 percent across July, August and September, compared with its August forecast of 8.9 percent for the third quarter.

Transport accounted for most of the latest decline. Its contribution to annual inflation fell to 4.0 percentage points from 5.1 in August, while food and non-alcoholic beverages contributed 0.7 percentage points, down from 0.9.

The smaller transport contribution does not reflect a fall in transport prices during September. The group’s price index rose 0.2 percent from August, illustrating how annual inflation can ease even while current prices continue to increase, because the comparison is with prices a year earlier.

Across the broader consumer basket, prices rose 0.1 percent during the month. Households therefore faced a slower increase in living costs, rather than a general reversal of earlier price rises.

Food offered some immediate relief as prices fell 0.6 percent during September, led by a three percent decline in vegetables. Meat prices dropped 0.9 percent, while bread and cereals fell 0.7 percent.

Other household expenses continued to climb, with housing, water, electricity, gas and other fuels index increasing 0.6 percent while rents only rose one percent.

Inflation excluding administered prices - those set or regulated by the government - fell to 5.3 percent from 5.9 percent in August. That placed the measure within the Bank’s objective range, which applies to headline inflation.

For the Bank of Botswana, the central concern has been the risk that earlier increases in regulated prices spread through the economy. Higher fuel and electricity costs can raise businesses’ operating expenses and feed into the prices of other goods and services.

Its August report identified these potential second-round effects as a reason for caution, alongside risks from livestock disease restrictions, possible adverse weather and international commodity prices.

“Against this background, continued vigilance and careful management of inflation expectations are necessary to ensure that inflation reverts to the medium-term objective range,” the report said.

Managing those expectations means maintaining confidence that inflation will return to low, stable levels. That task, however, has coincided with weak economic activity. The Bank reported growth of just 0.2 percent in the twelve months to March 2026, citing subdued global conditions, changes in diamond markets and slow progress in economic transformation among the constraints.

The Bank’s August forecast put average inflation at 7.9 percent in 2026 and 4.9 percent in 2027. It expected inflation to remain above the objective range through the first quarter of next year, before easing right into its objective range.

It also acknowledged that inflation could fall below its forecast if domestic and global activity remained subdued, fiscal constraints persisted or international commodity prices declined.

September’s improvement was evident across the country, though rural households continued to face the highest annual inflation. The rate in rural villages fell to 8.6 percent from 10.2 percent, compared with September readings of 7.7 percent in urban villages and 7.4 percent in cities and towns.