Another interest rates cut by the Bank of Botswana (BoB) is likely as inflation figures this week fell to single digits, for the first time in 14 months.

On Monday, the Central Statistics Office (CSO) reported that annual inflation for the month of May fell from 10.2 percent to 8.4 percent. The last time annual inflation figures was under 10 percent was in March 2008 when it stood at 9.8 percent.

In line with falling inflationary pressures and the need to support economic activity, the central bank has cut the bank rate three times since December and commercial bank made corresponding cuts.

Although Botswana has always had relatively high interest rates in the region, the cut in the bank rate in recent months has seen the economy enjoy the lowest real interest rates in more than ten years. The bank rate currently stands at 13 percent.

Speaking at the World Economic Forum in Cape Town last week, BoB Governor Linah Mohohlo said there was still scope for further reductions in interest rates in the country as inflationary pressures were still easing off.

In reducing interest rates, BoB said it recognises the favourable inflation outlook in the medium-term, which is the relevant timeframe for monetary policy and provides scope for monetary policy easing.

Although the central bank has cut interest rates three times since December, analysts still believe there is scope for more reductions because the bank rate should be around 11 or 12 percent by year-end.

However, BoB is likely to be watching developments on international markets closely as signs of an economic recovery have led to increases in oil prices.

Oil Prices, now hovering around US$70 per barrel from an average of US$50.18 per barrel in April, have led to subsequent fuel pump price increases here as well, which might lead to the building up of fresh inflationary pressures.

However Capital Asset Management Chief Executive Officer Leutlwetse Tumelo says that he believes the spike in oil prices is likely going to be temporary and therefore will not curtail the inflation decline significantly.

" I think a lot will depend on whether the increases in crude oil prices is sustained. The surge we are experiencing has been brought about by a wave of optimism on global economic recovery which I think is not going to last as the markets have run a little bit ahead of what is happening on the ground.

"So all in al I believe inflation is still going to come down to levels envisaged by the central bank and so will interest rates," he said.

The government announced adjusted prices by 56thebe per litre for petrol, 55thebe per litre for diesel and 18thebe per litre for paraffin, a development that mimicked last year's oil price surge which catapulted annual inflation to a high of 15.1 percent in August after international crude oil price reached US$147 per barrel in July.

Inflation has been on a downward trend since August last year largely due to the reduction in fuel prices which saw prices settle at under P5 per litre from around P8 per litre in the middle of last year.

The CSO said the Towns and Cities inflation rate fell by 1.9 percentage points from 8.4 percent in April to 6.5 percent in May. Urban Villages' inflation decreased from 10.4 percent in April to 8.7 percent in May, a decrease of 1.7 percentage points. Rural Villages' inflation dropped from 14.3 percent in April 2009 to 13.4 percent in May 2009, a decrease of 0.9 of a percentage point.

The national Consumer Price Index (CPI) for May was 126.4, recording an increase of 0.3 percent on the April index of 126.0. Rural Villages' index rose from 131.7 to 132.5, an increase of 0.6 percent. Urban Villages' index rose by 0.2 percent from 126.1 to 126.3 between the two months. The Cities and Towns' index moved from 123.7 to 124.0 between April and May 2009, an increase of 0.3 percent.