August 2020 Inflation trends and outlook on the Bank rate
Price growth in Botswana registered 1.0% y/y in August, 0.1ppt higher than the July figure. Between July and August, upward pressure on the headline figure was observed in the food and non-alcoholic beverages group index which ticked up slightly (0.3% m/m) owing to higher prices for bread and cereals (1.1% m/m) as well as oils and fats (0.6% m/m). Other noticeable changes emanated from the housing, water, electricity, gas and other fuels group index, which rose by 0.3% m/m due to increased costs associated with materials for maintenance and repair of dwellings (1.2% m/m). The pressure experienced in these groups is likely a result of disruptions in the importation of goods occasioned by the pandemic.
Over the remainder of 2020, the headline figure will receive some upward pressure from the demand side due to salary increases for government workers, expected to be effected in September. Government had deferred salary increments for public servants in April 2020, at the onset of the state of emergency – as of this month workers will receive the agreed 10% and 6% increment for the lower scales, including backpay from April. The higher public transportation fares announced at the beginning of September, as well as the possibility higher electricity tariffs, should also see inflation edge up in 4Q20. These developments are, however, unlikely to see price growth revert to within the central bank’s 3% - 6% objective range – we expect inflation to average 1.9% in 2020, remaining below 3% through to 2021.
The recessionary growth pattern that we anticipate in 2020 (-10.5% GDP in 2020), coupled with stubbornly low inflation dynamics and subdued demand prospects, all point to our fundamental view that the bank rate should trend lower in the short to medium term. We now expect the bank rate to trend lower to 3.75% in 2020 (currently 4.25%).