CPI can only go up from here
Botswana’s year-on-year headline consumer price inflation (CPI) increased to 4.6 percent in February 2014, up by 0.2 percentage point from January’s reading of 4.4 percent. This increase, following the lows of 4.1 percent in November and December 2013, supports our view that we have reached the bottom of the current interest rate and inflation cycle.
Inflation fell significantly since the middle of 2013, primarily as a result of the Central Bank of Botswana reducing the crawl rate of the pula exchange rate system.
February’s rate of 4.6 percent was also significantly lower than the 7.5 percent y/y rate recorded in February 2013. This is mainly due to the general price stability of the two major components of CPI, namely Food & Non- Alcoholic beverages and Transport. These two categories saw low increases of 3.5 percent and 1.9 percent respectively.
The Alcoholic Beverages, Tobacco & Narcotics category had the highest increase of 2.2 percent in February 2014 on a month-on-month basis. This follows the incremental increase in the alcohol levy, as well as the introduction of the tobacco levy in 2013, the effects of which have now filtered through. Alcoholic beverages had the biggest increase, rising by 2.4 percent between January and February.
Alcoholic Beverages, Tobacco and Narcotics added 1 percent to inflation, while Food added 0.8 percent, largely because of its significant weight in the CPI basket. Other group indices recorded modest increases during the period.
As a measure to differentiate between reaction of the monetary authority to domestic and imported inflationary pressures, we use tradable and non-tradable inflation. The non-tradable component of CPI is usually driven by the cycle in domestic production, while reaction to the more flexible tradable component can be viewed as more aligned to nominal exchange rate fluctuations. The all-tradable inflation rate rose by 0.4 percentage point in February to 4.8 percent y/y. Conversely, the imported tradable inflation rate dropped by 0.1 percentage point to 3.5 percent between January and February 2014, as a consequence of the stronger pula- rand exchange rate.
We expect pressure from imported food inflation to remain benign in the short term, but rise somewhat along with the expected increase in inflation in South Africa over the medium term.
Inflation seems to have bottomed and is now starting to edge up slightly. It is our view that inflation will remain within the Bank of Botswana’s inflation target range into the second half of this year. However, we will keep an eye on increases in administered prices and the scale of increases in civil servants’ salaries, as both of have the potential to push inflation higher.
*Analyst, Investec Asset Management
