The depreciation of the pula against the rand is also expected to add pressure on the prices of goods and services this year, the central bank said.
The revised average for inflation this year is mainly the result of the higher prices that trended in the first quarter of the year, during which inflation reached a 13-year high at 10.6% between January and February.
According to the April Monetary Policy Report released recently, inflation averaged 10.4% in the first quarter and the central bank expects it to decline to an average of eight percent, 7.1 percent, and 6.6 percent for the remaining three quarters of the year.
The quarterly forecasts are all higher than the BoB had initially indicated in the February Monetary Policy Report.
“Compared to the February 2022 forecast, inflation is projected to be higher in the short to medium
term, reflecting the recent increase in domestic fuel prices, the upward revision in forecasts for trading partner countries' inflation and international commodity prices, as well as a higher rate of depreciation of the pula against the South African rand than previously projected,” the BoB said in its April update.
According to the central bank, the Russia-Ukraine war is expected to push up international food and fuel prices, while domestic risk factors include annual increases in administered prices such as Botswana Housing Corporation rentals, as well as the increase in public service salaries.
A major headache for the bank, however, is the possibility that expectations of higher inflation become anchored in the economy, leading businesses to hike prices and therefore contribute to higher inflation.
The BoB recently increased interest rates in the market by 51 basis points, citing the need to curb the expectations of higher inflation that were noted in a recent Business Expectations Survey. The rate increase was the first in 14 years and came after the BoB had initially indicated it would wait out the higher inflation as it was mainly driven by supply-side factors.
“The increase (in rates) is warranted because of where the inflation expectations are in the medium term,” BoB Governor Moses Pelaelo told BusinessWeek during a recent briefing.
“Let me make it clear that no one is saying we do not have an inflation problem in Botswana or globally.
“What we are saying is that looking in totality at the inflation profile and trajectory, as well as where we want to be in terms of price stability, we had to raise the rates.”
The BoB's Research and Financial Stability director, Lesedi Senatla told BusinessWeek that while the factors that have led to the current high levels of inflation were transitory, the expectations fuelled by higher prices were not.
“Businesses are beginning to feel that inflation is going higher and higher and in fact, they believe that in 2022, inflation will average 8.5 percent and then decline to 7.5 percent in 2023,” he said.
“In order for us to tame those expectations, we felt it was necessary to raise the rates.”
Higher inflation expectations in the economy can be seen in demands for increased wages by workers as well as the upward trend in rentals, among others. BoB officials said these expectations could then turn into actual higher prices of goods and services, further pushing up actual inflation, and in turn increasing expectations for even higher inflation.
