Policy rate projected to reach 14% as inflation hits pandemic levels

The Monetary Policy Committee (MPC) of the Bank of Ghana is projected to increase the policy rate to 14 percent, in the light of consistent increases in inflation for the past few months, since May 2021 low of 7.5 percent.

For a fifth consecutive month, consumer inflation in the month of October 2021 rose to 11 percent; exceeding by one percent, the Bank of Ghana’s medium-term target of 8 percent with a band of ±2 percent. This comes ahead of the MPC’s meeting happening next week.

Per the Ghana Statistical Service (GSS) data, inflation had slowed down to 7.5 percent in May 2021 from 10.3 percent in February this year; since then, it has reverted back to the pandemic levels, largely on the back of increasing non-food inflation.

Sharing his projection to B&FT in an interview, Senior Investment Analyst at OctaneDC Limited, Kwadwo Acheampong said: “I see the MPC adjusting the rate up to 14 percent in the light of consistent increases in inflation for the past few months.”

Although the surge in inflation has been anticipated in the current bank’s outlook in July 2021, it stands as the highest in the last 15-months post-COVID 19, since August 2020, when the indicator stood at 11.5 percent. The year-on-year inflation rate for October 2021 was 0.4 percentage points higher than the 10.6% recorded in September 2021.

Over the period, this consistent increase has been on the back of surges in the prices of housing, water, electricity, gas, and other fuels have been the leading sectors driving headline inflation, at 20.6 percent, higher than the 12-months rolling average, from November 2020 to October 2021. Transport also recorded an increase of 14.9 percent, higher than its 12-months rolling average, from November 2020 to October 2021 of 9.7 percent.

“Oil prices are expected to remain high, probably till the end of February. A reduction in food inflation due to the harvest period may not be enough to weigh down the CPI till then. The MPC will likely be advised by these, in principle, to review its policy rate cautiously upwards to 14 percent,” Mr. Acheampong explained.

The latest inflation data also indicates that food contribution to overall inflation has declined, contributing less than half to overall inflation. Food inflation’s contribution to total inflation further dropped from 48.6 percent last month to 44.9 percent in October. But on a monthly basis, food inflation was -0.3%, which is lower than the twelve-month national average of month-on-month inflation.

Inflation Forecast

Per the central bank’s outlook, key upside risks to the inflation outlook include the continuous uptick in ex-pump prices of petroleum products, and possible fiscal pressures, as well food prices, although it has remained subdued over the period.

The market still believes that single-digit inflation is attainable this year, even though inflation has strayed above the 10 percent limit, barring any unexpected shocks, beyond the current factors driving inflation.

Currently, the central bank is confronted with the view that the drivers of inflation are cost-push and structural factors, which are not immediately within the reach of monetary policy, unlike demand-side forces.