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Introduction
- The aim of the monetary policy of the Bank of Botswana is to achieve and maintain monetary stability, defined as a low and sustainable rate of inflation. It is the principal way in which the Bank contributes to the broader national objective of improving the economic well-being of the nation. The annual Monetary Policy Statement affords the Bank an opportunity to report on inflation and monetary developments during the previous year, and to present its assessment of the inflation outlook for the current year. It also contains the Bank’s annual objectives for inflation and an explanation of how these are derived in the context of the Bank’s monetary policy framework. The Statement outlines the approach that the Bank will take in formulating its policy response to inflation-related developments throughout the year. Therefore, the Monetary Policy Statement has a significant role in conveying to stakeholders and the public at large a range of information relating to inflation and monetary developments as well as the formulation and implementation of monetary policy.
- Consistent with past practice, the 2005 Monetary Policy Statement reviews developments in inflation in the previous year and their underlying causes, and assesses the extent to which monetary policy was successful in meeting its objectives. This is followed by a presentation of the Bank’s analysis of prospective developments during 2005 and, based on that, the policy outlook for the current year.
- In summary, the Statement concludes that higher prices following the devaluation of the Pula in February and increases in administered prices were the primary sources of the upward pressure on inflation in 2004. Consequently, while inflation was within the objective range of 4 – 7 percent for most of the year, it breached and remained slightly above the upper limit in the fourth quarter. Domestic demand pressures were moderate, partly due to the lower rate of fiscal expansion and the restrictive stance of monetary policy, both of which resulted in reduced private sector credit demand. While global economic activity improved and there were added inflationary pressures due to historically high oil prices, external inflationary pressures were generally benign. Looking ahead, global inflation is expected to remain low due to pre-emptive monetary policy tightening in some of the major industrial countries and continued strong competitive pressure in goods markets internationally. Domestic demand pressures are expected to remain subdued in the context of the continuing moderate expansion in government expenditure and private sector credit growth. Therefore, assuming no further substantial increases in administered prices, chances are good that the upward trend in inflation experienced in 2004 will be reversed in 2005. The task for monetary policy in the circumstances will be to ensure that any deceleration in the rate of price increases is durable and consistent with the Bank’s inflation objective.
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