21 Feb 2016

Inflation benefited from downward trend in global price changes, Bank of Botswana governor, Ms Linah Mohohlo has said.

Speaking at the launch of the Monetary Policy , Ms Mohohlo said inflation eased to 3.1 per cent in 2015, compared to 3.8 per cent of the year before.

“In fact, inflation was below the lower end of the 3-6 per cent medium-term objective range on four occasions last year. The main drivers were a significant easing of food price inflation which slowed down from 2.5 per cent to 0.7 per cent, and fuel prices which fell by 15.7 per cent,” she said.

She further said low inflation also resulted from subdued overall domestic expenditure. The 13 per cent increase in total budgetary outlays was fairly close to that of 2014, she said.

“Moreover, the high import content of the increase in development spending limited its spill-over effects to spending on domestic goods and services,” she said.

She said the recurrent expenditure, which included the 6 per cent civil service salary increase, did not add much to inflationary pressures. The central bank governor said commercial credit continued to slow, and increased at almost half the 13.5 per cent seen in 2014.

Ms Mohohlo said household borrowing picked up from 9.4 per cent to 12.8 per cent while growth in business credit slowed markedly, from 17.2 per cent to –0.3 per cent, in this way reflecting lower business confidence in the face of sluggish economic growth.

“In turn, businesses had little incentive to borrow, while banks were more cautious to lend to businesses,” she said. Ms Mohohlo said the monetary policy was conducted in slow economic growth, downward trend in inflation, sluggish growth in credit and little fiscal expansion.
 

“The policy continued to be guided by an inflation forecasting framework that informs an appropriate response to deviations of price movements from the 3-6 per cent medium term objective range,” she said.

She said the Bank Rate was reduced twice last year by a total of 1.5 per cent to 6 per cent. Correspondingly, commercial banks reduced the prime lending rate by an equivalent amount to 7.5 per cent.

Ms Mohohlo said household credit growth was in line with modest growth in personal incomes and mortgage lending slowing against the background of weaker property market.

On economic growth, she said it was forecast to grow by 4.2 per cent this year, an improvement over last year’s one per cent expansion. “Although overall expenditure will be supported by government spending, severe revenue constraints explain a decrease of 2.7 per cent in total government expenditures for the 2016/17 fiscal year, compared to the 2015/16 fiscal year,” she said.

She said a deficit of P6 billion, or 3.8 per cent of GDP, as projected, leaves limited room for further fiscal stimulus. “Economic activity will also continue to be vulnerable to power supply and water shortages, weak global demand and low commodity prices,” she said.

She said inflation is expected to remain within the 3–6 per cent range in the medium term. “As always, the upside risk to the inflation forecast includes any upward adjustment in administered prices beyond current projections,” she said.

The governor said other risks are food prices, should the drought conditions persist in the region. ENDS