Ghana’s headline inflation is likely to slow further downwards raising prospects of a series of interest rate cuts as the government moves to spur growth.
The country’s headline inflation rose to 16.9 per cent in August, having dropped from 19.2 per cent since March, prompting calls for the Bank of Ghana to ease Monetary Policy rate in its round of sittings.
Controlling inflation has dogged Ghana for years, a symptom of a broader economic crisis that emerged in 2013 with falling commodity prices, forcing the government to seek financing from the International Monetary Fund, which prescribed an austerity programme last year.
The Bank of Ghana has maintained its benchmark borrowing costs at 26 per cent for the sixth consecutive time, the highest since 2004.
At the Monetary Policy Committee news conference in Accra, Bank of Ghana Governor, Dr Abdul-Nashiru Issahaku was upbeat that inflation would hit the bank’s target of 8 per cent, plus or minus two percentage points, by the second quarter of 2017 rather than the third as previously forecast.
The annual inflation in Ghana reduced to 16.9 per cent in August of 2016, from 19.2 per cent in March had seen series of drops. The rise in consumer prices was mainly due to higher cost of housing and utilities and transport
Inflation targeting
But the Bank of Ghana core inflation targeting, which excludes energy and utility prices, which had consistent drops in the last few months.
Year-on-year non-food inflation for August stood at 21.5 percent, compared with 21.2 percent in July. Food inflation was 8.5 percent, down from 8.6 percent in July, the office said.
Inflation is projected to fall in the medium term as a result of an International Monetary Fund programme the West African country began to implement last year to restore balance to the economy.
Inflation is politically sensitive ahead of what is expected to be a tight presidential election in December, in which President John Mahama will run for a second and final four-year term in office.
The main opposition New Patriotic Party says the government has damaged the economy despite natural resources ranging from gold and oil to cocoa. It points to macro-economic problems and a slowdown in growth as evidence.
The ruling National Democratic Congress says the country’s economic difficulties have been driven by external factors it has worked to resolve.
With the series of drops in inflation, economists and business leaders say the ultra-high benchmark rate distorts the economy and inhibits growth.
“It’s a bitter pill we are swallowing right now to ensure that stability returns to the economy,” Dr Issahaku told a news conference after a policy meeting.
The “substantial” fall in inflation would pull rates lower, he added.
“The Monetary Policy Committee noted the moderation in headline inflation since the July meeting on the back of continued cedi stability, easing inflation pressures and tight credit conditions,” the Governor said.
Crucial time
Dr Issahaku takes over at a crucial time for the bank, one year into the IMF programme. Some fear the election will put pressure on policy makers, including the central bank, which is independent, to loosen financial controls.
It also comes as the bank’s main lending rate stands at 26 per cent, leading to complaints by many in the business community that it is stifling growth.
But an economist lecturer at the University of Cape Coast, Dr John Gatsi posits that all the components of inflation has recorded positive gains.
Dr Gatsi is upbeat of drive towards lower interests’ rate in the next round of sitting of the monetary policy committee.
“Disruptions caused by the exchange rate volatility have been positive, whiles the IMF third review has been consolidated coupled with the stability in the energy sector have contributed to reduction in inflation”, he added.
“Given cedi stability and the Bank’s expectation that inflation will still be within the target range by Q2, 2017, any improvement in year-on-year inflation is likely to allow for the start of a sustained easing cycle,” he said.
Analyst’s expectations
Several analysts including Ms Razia Khan, Head of Africa research at Standard Chartered, had expected the Bank of Ghana to review downwards its policy rate by at least a 100 basis points.
Ghana’s economy needs to expand by more than eight percent a year to create jobs for its growing population, its president said on Wednesday, a tough challenge for a country battling a fiscal crisis and weaker prices for its commodity exports.
Once Africa’s star economy, Ghana has seen growth shrivel in the past two years and is expected to stand at 3.9 percent in 2015, below average for sub-Saharan Africa.
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