Botswana maintains rate as inflation rise seen transitory

Botswana’s central bank left its benchmark bank rate steady for the second time to maintain an accommodative monetary policy stance, saying it expects the  economy to operate below full capacity in the short and medium-term and thus not create any inflationary pressures and a forecast rise in inflation this year is partly due to transitory factors.

The Bank of Botswana (BoB) kept its bank rate at 3.75 percent, unchanged since October last year when it was cut for the second time in 2020 in response to a contraction in economic activity and below-target inflation as the country’s key mining and tourism sectors were hit by the COVID-19 pandemic.

Botswana’s central bank has been in a monetary easing cycle since December 2010 and has lowered the rate 12 times and by a total of 6.25 percentage points, including two cuts by a total of 100 points last year.     

Botswana’s inflation rate ticked up to 2.3 percent in January from 2.2 percent in December, but is still below the bank’s target range of 3.0 to 6.0 percent.     

“Nonetheless, inflation is forecast to revert to within the objective range in the second quarter of 2021 and subsequently move closer to the upper bound partly due to transitory factors,” BoB said, pointing to value added tax, sugar tax and fuel levy.   

“Overall, risks to the inflation outlook are assessed to be balanced,” said the bank, reiterating its view from its last policy meeting in December, 2020.   

The economy of land-locked Botswana contracted by 6.4 percent in the 12 months to the end of September last year from growth of 3.7 percent in the same 2019 period, as mining output fell 21.9 percent and non-mining shrank 4.7 percent.     

The central bank noted that Botswana’s finance ministry estimates a 7.7 percent contraction for the full 2020 year, up from an earlier estimate of 8.9 percent, and then growth of 8.8 percent in 2021, with the economy performing better in the fourth quarter of last year as compared with the third quarter given easier COVID-19 movement restrictions.