BoB expects temporary drop in inflation

Mbongeni Mguni | Tuesday May 2, 2023 06:00

The central bank has a medium term objective range for inflation of three to six percent, which it considers conducive for economic growth and stability in the country. However, inflation was last within the objective range in April 2021, as the impact of increases in various taxes and levies, as well as frequent hikes in administered prices such as fuel, have pushed the cost of living to 14-year peaks.

Projections shared by the BoB on Friday, however, point to reduction in the pace of inflation in the third quarter of this year. The BoB expects that inflation will revert to the three to six percent range by the second quarter of next year.

“Inflation is projected to revert to within the objective range temporarily in the third quarter of 2023, before reverting on a sustained basis from the second quarter of 2024,” the BoB said.

Inflation is expected to pick up in the fourth quarter and end the year around 6.5 percent. The BoB expects inflation to average 7.2 percent this year, down from 12.2% last year.

Governor Moses Pelaelo told journalists that the projected decrease in inflation in the medium term is due to the weakening impact of the earlier increases in administered prices such as fuel prices as well as modest domestic demand. The increase in interest rates last year was also tapering demand for credit, while tightening financial conditions globally would also bear down on local inflation.

He added that downward pressure on local inflation would also come from the projected appreciation of the pula against the South African rand. South Africa accounts for much of the country’s import bill and a stronger pula will mitigate the impact of imported inflation.

“The Monetary Policy Committee projects that, in addition to the dissipating impact of administered prices, the economy will operate below full capacity in the short-to-medium term and, therefore, not generate demand-driven inflationary pressures,” Pelaelo said. “Thus, inflation is projected to trend downwards and revert to the objective range in medium term.”

Upward risks to the inflation outlook include possible adjustment in administered prices that are not factored in the current projections, entrenched expectations for higher inflation, any realised upward pressure on wages as well as any, overshooting of prices stemming from Value Added Tax (VAT) returning to 14%.

Local consumers have suffered over the months as the cost of living has risen sharply, particularly in items such as food and beverages, as well as the cost of transport. Last year, government introduced temporary inflation measures designed to soften the impact of rising prices on consumers. The measures included a temporary cut in VAT to 12% as well as tax cuts on some essential commodities.

Earlier this year, the Finance Ministry pushed through legislative amendments that zero rated VAT for salt, sanitary pads, vegetables, cooking oil, infant formula, condoms, baby diapers and Liquefied Petroleum Gas (LPG).