Drop in inflation shouldn’t raise fears of deflation…for now

Over the last few years, inflation has gradually dropped from a 12.5 percent high in 2008. Because of improvements in the global economy, which has started showing positive signs, global inflation has largely dropped despite uncertainty in Europe and Japan. Local inflation has imaged the drop in inflation across the world, largely driven by the Central Banks, which have adjusted interest rates and other monetary policy facilities.

Inflation currently stands at 4.3 percent, which is within the Bank of Botswana’s 3-6 percent objective. This also augurs well for consumers because most workers have not had any significant salary increments since the global economic recession. The constant drop in the rate of inflation was also coupled with stagnant fuel prices and a gradual but slow increase in food prices.
Analyst at Blackthred, Karabo Tladi believes inflation will continue to trend down to the lower limit of the Bank of Botswana’s objective range of 3-6 percent because international oil prices are currently trading at around US$80 a barrel.

“Continued decline in inflation should see international food prices going down as well, which is good news for net food importers like Botswana. Imported inflation from South Africa has also been dispersed by weakening of the South African Rand versus the Pula,” he said.

Tladi added that a weaker Rand has contributed in keeping production costs down and maintaining positivity in the general economy as Botswana imports up to 70 percent of food and fuel from South Africa. As a result, Tladi believes the Central Bank will continue maintaining low interest rates as a way of kick starting the local economy.
“I don’t see the Bank of Botswana increasing interest rates any time soon. I think it’s too soon, the economy still remain very fragile. I think increasing interest rates would be disastrous at this stage,” he said.

Economist at the University of Botswana, Professor Emmanuel Botlhale believes the downward trend in inflation from highs of 12 percent in the past to low levels of 4.5 percent should be celebrated.
“This is something to celebrate. These are historic lows by any and every measurement. Amongst other benefits, a low inflation environment will enable domestic enterprises to compete in the global market,” he said.

While low inflation rates have worked well for Botswana in the face of  a slowdown in the economy, could there be any worries for deflation?
Deflation being a general decline in prices often caused by a reduction in the supply of money or credit, decrease in government spending and personal or investment spending. Botlhale believes circumstances on the ground do not warrant any fears for deflation as in developed countries such as Japan.

“We will only start panicking if inflation rates go down to as low as two percent. Right now we should not be worried about declining inflation. We are very far from deflation. We will only start worrying if inflation goes below the lower limit of the Bank of Botswana’s objective range of 3-6 percent,” he said.