INFLATION WATCH

MAUNGO LEBANNA | Monday July 28, 2008 00:00

The June reading is the highest rate announced since the controversial rate of 17.7 percent announced in March 2006 in which the Education index was overstated from January to March and which was revised to 13.8 percent.   

Just when we thought inflation would never go back to those dreaded levels, food and fuel prices seem to be driving it that way. The 2.4 percent month-on-month increase in the June number is entirely ascribed to food and fuel prices.

Transport inflation has now reached an all-time high of 35.6 percent as a result of soaring petrol and diesel prices, while food inflation has risen to 18.2 percent, slightly below the May number.

Soaring food and fuel prices are not just a domestic concern; they are a global phenomenon and pose a serious challenge to global economic growth.

When local fuel prices were hiked on June 19, crude oil was trading at $132.26 per barrel. Should oil continue trading at these high levels, we should expect additional hikes in the short-term.

Already, the Bank of Botswana has adjusted interest rates upwards by one percent from May 26 to June 19 in an effort to contain second-round effects and inflation expectations.

However, it remains questionable whether increasing interest rates will assist in containing inflation when most of the inflation pressure is imported.

Imported inflation is currently sitting at 19.3 percent, triggered by the rising prices from Botswana's biggest trading partner, South Africa, whose inflation is also on an upward trend and continues to exceed the South African Reserve Bank's 3 to 6 percent target band.

With persistently high crude oil and food prices, there is little indication that relief is likely to come soon, especially since Botswana was too late in reacting to the rising crude oil prices as a result of the country's fuel subsidies. In moving towards cost recovery to make up for the previous increases, we are likely to see inflation rising further. Although we expect BoB to keep rates steady at the current levels until the end of the year, a further 50-basis point rate hike is looking extremely likely. 

*Maungo Lebanna is an analyst at Investec Asset Management Botswana