Maungo Lebanna
21 April 2008
opinion
Consumer inflation continued its steady climb, with all measures rising further in March. The figures provided few surprises, but headline consumer inflation came in slightly above our expectations of 9.5 percent at 9.8 percent.
The 0.8 percent increase in headline inflation from 9.0 percent in February was attributed to continued upward pressure in food and transportation costs. Overall, there was evidence of a more broad-based inflation pressure amongst five group indices that recorded changes of more than one percent over the month. Core inflation, which excludes administered prices, jumped to 8.9 percent from 8.6 percent in the previous month.
The inflation profile continues to worsen in light of persistent high food and fuel prices. However, it is interesting to note that on an annual basis, food inflation eased from 18.5 percent to 18 percent, giving us hope that the food price momentum will decelerate with time.
The 48t/l and 161t/l increase in petrol and diesel prices on 15 April is expected to push operating costs in the transport index up by 5.5 percent, while the 155t/l and nine percent increase in paraffin and electricity prices is bound to push the housing index up by 1.2 percent.
In Botswana, petrol had for a long time been used to subsidise increases in diesel and paraffin. The recent fuel hike suggests this is no longer the case; diesel and paraffin price increases exceeded those of petrol by more than half, making up for the actual under-recoveries in the system.
Looking ahead, the increasing price pressures in food, non-food and energy components continue to pose greater risks to the inflation profile.
Our inflation outlook for April remains negative. We expect headline inflation to peak at 10.6 percent and thereafter slowly move lower to end the year above the 4-6 percent target band.
Despite the Bank of Botswana's (BoB) assertion that monetary policy is tight, the Bank is in fact loosening monetary policy by not hiking rates.
Inflation rose from 6.4 percent in June last year to 7.5 percent when BoB cut the bank rate to 14.5 percent. Since then, rates have remained on hold. BoB is therefore risking higher inflation expectations, which will undermine its ability to meet the inflation target in the short and medium term.
* Maungo Lebanna is an analyst at Investec Asset Management Botswana
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