Curbing inflation is 'a delicate balancing game' - Mohohlo

'We are witnessing what I call a perfect storm,' Governor Linah Mohohlo said at the launch of the Bank of Botswana Annual Report for 2007 on Tuesday.

But it reached double digits 11.1 percent in April due to increasing food and fuel prices, undermining BoB's inflation target of 3 to 6 percent in the medium-term.Subsequently, BoB increased its key interest rate by 50 basis points to 15 percent in May to try to curb inflation.

However, the central bank said it expected inflation to subside towards the end of the year to average 6 percent.

Mohohlo said in efforts to contain inflation, the bank would also be mindful of the country's economic growth.

'Its our responsibility that we anchor inflation expectations,' she said, 'but we have to make sure we don't undermine economic growth. It's a delicate balance.'

Corroborating the Governor's interpretation, BoB's Deputy Director responsible for Research, Matthew Wright, said the current rise in inflation was due to second round effects - which were likely to spread in the short-term - flowing from high fuel prices.
'We are concerned, but we will turn the corner,' Wright said. 'When you look at the price trends of commodity groups, the significant changes are in the transport group due to fuel price increases while other groups have been stable. There is little we can do about it because it has been in the system for a while.'

The national Consumer Price Index (CPIX) for April was 114.4, up by 2.1 percent on the 112.1 for March.

The Transport group index registered an increase of 5.8 percent from 112.8 to 119.3 between the two periods. This was due to the rise in the constituent index of Operation of Personal Transport, which rose by 10.0 percent from 112.1 in March to 123.4 in April. 
The increase in Operation of Personal Transport index was mainly due to the rise in pump prices for both diesel and petrol by P1.61 and P0.48 per litre respectively, which were effected on April 14.

 The central bank said its monetary policy framework centred on the annual Monetary Policy Statement (MPS) has continued to evolve. In the 2008 MPS, BoB introduced several changes to the framework, including abandoning both the short-term inflation objective and commercial bank credit growth as an intermediate target.

Going forward, BoB said inflation forecasts it produced would be a principal guide for setting monetary policy to meet a three-year rolling inflation objective.'For this to be effective, it is essential that the inflation forecasting capability of the Bank is further consolidated,' it said.

'In addition, effective communication concerning policy decisions will reinforce the credibility of the process and guide public expectations regarding the future path of inflation.'

Meanwhile, an economic analyst yesterday told potential foreign investors that with continuing hikes in crude oil prices, domestic inflation would continue to be high while authorities would be forced to increase cost of borrowing.Speaking at the on-going Botswana Economic Forum (BEF), the Managing Director of Econsult Dr Keith Jefferis said 'inflation will come down as quickly as it went up' (only) if the price of crude oil stopped rising.

'We are seeing inflation rising driven by fuel prices,' Jefferis said in response to a question from a delegate from Morgan Stanley.

'We are at 11.1 percent and we could see 12 percent by the end of this month. But inflation is expected to go down to a single digit by the end of the year or early next year.'

Jefferis added that with the current figures, there was nothing the Monetary Policy Committee (MPC) could do regarding interest rates.

Two weeks ago, the MPC responded to rising inflation by raising its benchmark rate (Bank Rate) by half a percentage point or 50 basis points from 14.50 percent to 15 percent.

'There could be another 50 basis point increase,' Jefferis warned.But 'if oil prices behave themselves' and fall, he added, inflation could take the same route and fall to between 7 or 8 percent.