BoB sticks to inflation-fighting plan
Mbongeni Mguni | Monday September 5, 2022 06:00
The BoB kicked off the three interest rate hikes it has made this year in April, saying while inflation is being driven by external costs rather than local demand, the rate actions were required to ensure that expectations of higher inflation do not become entrenched in the local economy.
The threat of inflation expectations becoming entrenched in the economy is associated with firms pricing their views of future inflation into their products and services, property owners doing the same with their rental reviews, workers with their wage demands and so on, which self-actualises into higher real inflation.
The central bank’s last Business Expectations Survey, however, showed that despite the rate hikes, in the second quarter of the year, local firms expected inflation to average 8.5 percent this year, compared to the first quarter’s survey when they expected 8.3 percent.
Further doubts about the short to the medium-term direction of prices were stoked in July, when inflation hit 14.3%, the highest level in 14 years. The BoB also moved the time when it expects inflation to return to the three to six percent objective range, from the third quarter of next year to the third quarter of 2024.
Responding to BusinessWeek questions during a briefing last week, BoB executives defended the central bank’s approach to tackling inflation, noting that the bank had enjoyed success in the past in bringing down high levels of inflation.
“At some point in the past, we had inflation as high as 13% and we were able to bring it down to the objective range and in fact for a long time, inflation was below the three percent lower band of the objective range,” Deputy Governor Tshokologo Kganetsano told BusinessWeek. “This shows that we are confident in what we are doing and that we have the ability and capability to control inflation. “We have a good track record and we hope the general public and businesses have that confidence in us so that when we say we are trying by all means to bring it down, that should influence expectations among them.”
The BoB's Research and Financial Stability director, Lesedi Senatla acknowledged that while the latest survey had shown higher inflation expectations amongst local firms, these views were based on transitory factors that would peter out of the inflation calculation in time.
“We are not helpless that anyone should think inflation is out of control,” he said. “They (firms) are basing their expectations on what they are seeing now on the ground and part of what they are seeing will fall out of the inflation calculation. “If inflation is going up because of an event like increases in prices of fuel, electricity or Botswana Housing Corporation rentals, that will wash out of the system at some point in time and if they see that the central bank is doing something about inflation, the firms are duty-bound to change their expectations.”
He added: “What they are seeing is a bank that is fighting inflation tooth and nail so going forward these expectations will be adjusted.”
The central bank is also hoping the recently announced inflation relief measures slow down the increase in the prices of goods and services in the short term. The BoB’s experts expect the measures to ease inflation by 1.23 percentage points, but also acknowledge that this projection may not be realised.
For the BoB's part, Governor Moses Pelaelo said the inflation shocks seen this year were a reminder of the central bank’s advice that the local economy needs to innovate, reduce the costs per unit of production and heighten its competitiveness locally and globally.
He said in the meantime, the central bank was focusing on communicating with businesses and the general public about the sources of inflation in order to manage inflation expectations.
“That’s why we want to appeal to businesses and everyone else to listen to us about the inflation trajectory and what the causes are,” he told BusinessWeek. “One reason we meet with the media is so that we communicate very clearly what the sources of inflation are so that everyone understands these. “Also, I have said let’s share the burden of fighting inflation and one way to do this is to look at our productivity and innovation. “Increases in productivity will help to reduce inflation at the end of the day.”
The bank is this week due to publish its Monetary Policy Report containing a full update of the outlook for the domestic economy and inflation. The next interest rate decision will be taken on October 20.