allAfrica.com: Botswana: Annual Inflation Surges Ahead (Page 1 of 1)

The annual inflation rate continued to soar further in the month of February, adding 0.6 percentage points from 8.4 percent to 9 percent, mainly on the back of rising fuel prices.

This is the fith successive rise in the inflation rate as prices continue to increase, reflecting a worldwide trend where energy and food prices are continuously ballooning. "In February, headline inflation, as measured by the Consumer Price Index (CPI), rose further to 9.0 percent from 8.4 percent in January.

The major factor contributing to higher inflation was an increase in transport prices where inflation rose from 9.2 percent to 11.2 percent due to rising costs of fuel," a Bank of Botswana statement on the issue said. With further food and oil price increases anticipated on the international market, the Bank of Botswana has abandoned tasking itself with setting and achieving an annual inflation objective, saying the price stability objective can only be realistically achieved in the medium term (a rolling three year period), in recognition of the time lag for monetary policy to impact on price developments.

This abandonment of a short-term horizon in inflation rate targeting comes against the backdrop of the central bank's failure to achieve its 4 to 7 percent target in 2007.

BoB Governor Linah Mohohlo said in her 2008 monetary policy statement that the annual inflation rate would be tamed to between 3 and 6 percent in the medium term (a rolling three-year period), although it is anticipated to converge to the objective as early as in 2009.

Apart from the fuel factor in February inflation figures, there were also substantial increases in inflation for Furnishing, Household Equipment and Maintenance (3.6 percent to 4.4 percent), Health (from 11.1 percent to 14.7 percent), Education (from 0.4 percent to 4.2 percent) and Restaurants and Hotels (from 12.0 percent to 13.0 percent)." For Housing, Water, Electricity, Gas and Other Fuels, inflation declined from 3.9 percent to 3.2 percent. Clothing and Footwear and Communication continued to record negative inflation. "Tradeable Goods and Services inflation was marginally up at 11.3 percent from 11.1 percent in January. The Non-tradeable Goods and Services inflation also rose from 3.0 percent to 3.8 percent," said BoB. The trimmed mean and the measure of core inflation that excludes administered prices both increased steeply between January and February, from 7.9 percent (revised from the original figure of 8.5 percent) to 8.7 percent and from 7.2 percent to 8.6 percent, respectively.

Looking ahead, inflation is expected to continue to maintain its upward trend, though BoB thinks domestic inflation will, on average, be just above 8 percent in the first quarter of 2008, and fall close to 6 percent towards the end of the year.

But there are upside risks to this outlook because of possible large increases in administered prices, which include power tariffs and the BHC. Moreover, any large increase in public service salaries will impact on aggregate demand. Government salary increases are likely to be emulated by the private sector seeking to maintain remuneration differentials.

This will add to domestic demand as well as production costs and consequently inflationary pressures, Mohohlo said.The Botswana Power Corporation (BPC) has already indicated that it will pass any further increase in costs to the consumer if Eskom goes ahead with its plans to increase power tariffs by 14.2 percent in the 2008/09 financial year. In the past 14 months, the price of oil has risen 79 percent, and there seems to be no indication that this trend will be reversed soon. Meanwhile, the International Food Policy Research Institute has reported that the world is eating more than it produces and food prices may climb for years because of expansion of farming for fuel and climate change, risking social unrest.

Imported inflation from South Africa could also keep monetary authorities on their toes because of projected rapid price increases in South Africa in the first three months of this year. On the sidelines of a recent conference in London, BoB Governor Mohohlo was quoted by Reuters as saying Botswana would not lower interest rates again until inflation peaks and begins a downward trend.

"We want to be able to contain inflation expectations by maintaining a restrictive monetary policy in the near-term," she was quoted as saying by Reuters.

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