High food and energy prices spur inflation rate

RETHABILE MOHONO                                             

MASERU – Domestic inflation has climbed to 6.5 percent, indicating a rise from the previous month’s rate of 5.8 percent, an upsurge that can be attributed to elevated food and energy prices, coupled with a depreciating exchange rate. Several factors, including the persistent depreciation of the loti, fluctuating crude oil prices, administered prices, and the potential impact of El Niño, also pose risks to the medium-term inflation outlook.

The Central Bank Governor Dr Letete, disclosed that the Monetary Policy Committee recently convened its 104th meeting where it extensively discussed various economic aspects, including global, regional, and domestic developments, as well as the financial markets.  Notably, the committee observed that the global economy is gradually recovering from the pandemic’s impact, geopolitical tensions, and the rising cost of living. However, they anticipate a deceleration in growth, projecting a decrease from 3.5 percent in 2022 to 3.0 percent in 2023, and further declining to 2.9% in 2024.

“Economic activity in selected advanced and emerging market economies generally slowed down in the third quarter of 2023, except for the US, where growth slightly increased mainly due to increased spending,” he said, adding that the slowdown in growth in the selected economies was mainly driven by weak consumer demand and investment. He further indicated that South Africa’s economic activity is expected to remain muted, as the persistent power crisis continued to cripple key sectors of the economy such as mining and manufacturing.

However, Dr Letete said the labour markets for the selected economies showed mixed signals since the second quarter of 2023. “Unemployment rates increased for the US, the euro area and Japan while they remained unchanged in the UK and declined in China and South Africa,” he said. Inflation is an increase in the prices of goods and services. The most well-known indicator of inflation is the Consumer Price Index (CPI), which measures the percentage change in the price of a basket of goods and services consumed by households.

Inflation rates generally declined in the selected advanced and emerging market economies in October 2023 but largely remained above their target levels, he said.  “This was mostly due to decreasing food and fuel prices. Nonetheless, South Africa’s inflation rate rose during the same period. As a result, most central banks kept their policy rates unchanged in their latest policy decisions,” he said.

Dr Letete said local economic activity recovered in the third quarter of 2023 due to a pick-up in demand as well as improved performance in construction and services, particularly transport. Nonetheless, he said the persistently weak manufacturing sector moderated growth. He added that the Lesotho Highlands Water Project Phase II project and its knock-on effects on the services sector is expected to underpin growth in the medium term.

“Domestic inflation increased to 6.5 percent in October 2023 from 5.8 percent in  September 2023. Food and energy prices, coupled with a weak exchange rate were the main contributors to the rise in inflation. The continued weaker loti, volatile crude oil prices, administered prices as well as the risk of El Niño present upside risks to the medium-term inflation outlook,” he said.

He further stated that government operations registered a surplus equivalent to 2.5 percent of Gross Domestic Product in the third quarter of 2023.  “During the same period, the stock of public debt declined to 59.9 percent of GDP from 61.4 percent, due to amortisation and redemption of treasury bills, moderated by new disbursements and treasury bond issuances,” said Dr Letete.

He further said due to these reasons, the committee decided to leave the Net International Reserves (NIR) target floor unchanged at US$710 million. “At this level, the NIR target will be sufficient to maintain a one-to-one exchange rate peg between Loti and the Rand,” he said adding the CBL rate remains unchanged at 7.75 percent per annum.