'Bank rate increase to curtail credit growth'

After sticking to their guns for a while, BoB last week finally raised the bank rate from 14.5 percent to 15 percent as a counter inflationary measure.

This followed a seven-month rally of the annual inflation figure rising from 6.8 percent in September 2007 to 11.1 percent in April this year.

In an interview with Business Week, Jefferis said although most of the inflation was exogenously exerted on the economy, the bank rate increase should be effective in taming second round effects of the pressure.

'The bank increase by the central bank was nothing unexpected as inflation had been on the increase for some time,' he says.

'Although much of the inflation is coming from outside as a result of hikes in the prices of fuel and food, thereby limiting, to some extent, the effectiveness of any policy instruments here, the bank rate increase should be effective in knocking down the building pressures.

'The bank's strategy is to try and control the second round effects and try and prevent what is called inflation spreading.'

Interest rates are one of a number of monetary policy instruments used by  monetary authorities to control inflation by way of stifling consumer demand through tightening money supply growth.

With food prices, which make up 21 percent of the Consumer Price Index (CPI), further anticipated to firm strongly on the international market due to shortages and oil price increases, the Bank of Botswana has abandoned tasking itself with setting and achieving an annual inflation objective, arguing that 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.

Asked whether the magnitude of the increase was enough to tame the anticipated inflationary pressures, Jefferis says it is still difficult to tell if the margin of the rate increase will be effective at the moment.

'At this moment, I can't say whether the 0.5 percentage points increase will be enough to control inflation,' he says.

'But I believe it will achieve its objective of cutting down credit growth and consumer spending. It is possible the increase could deter borrowing.'

At the announcement of the 2008 monetary policy statement earlier this year, Bank of Botswana Governor Linah Mohohlo said domestic inflation would, 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.

However, it seems the bank has further bowed down to inflationary pressure as by revising its inflation target upwards.

The bank now expects that inflation will maintain an upward trajectory in the short-term, up to the fourth quarter of the year, before declining to around 9 percent in the first quarter of 2009.

Announcing its decision to increase the rates, the bank said the risks to the inflation outlook were predominantly upward due to, among otherfactors, growing pressure on demand with the likelihood of a further increase in fuel prices and associated second-round effects.