September 22, 2020

End of year inflation target likely to be missed – Economist predicts

Economist, Dr. Lord Mensah, has cast doubt on Ghana’s ability to achieve its end of year inflation target of 8 plus or minus 2 percent.

After remaining dormant at 7.8 percent in the first quarter, inflation rose sharply to 11.2 percent in the second quarter of 2020.

Dr. Lord Mensah believes major factors such as the impending election and the Christmas season will make it difficult for the country to attain its initial inflation target.

The country has been enjoying single digit inflation since August 2019 until March 2020. But according to the Bank of Ghana’s Inflation Outlook Report, the sharp rise in inflation in the second quarter of this year has caused a slowdown in the rate.

The Central Bank says the disruption in the disinflation process has a potential of prolonging the time horizon for reaching a stable state of inflation.

Latest forecast shows that inflation is currently above its upper limit, driven mostly by food prices. According to the report, the projections show a return of inflation to the medium-term target band by the second quarter of 2021, partly conditional on corrective fiscal measures being introduced in the near-term.

It also states that inflation expectations of the financial sector, businesses, and consumers have all trended upwards which could compel the Monetary Policy Committee to adjust the Policy Rate which is the rate at which it lends to commercial banks upwards from the present 14.5 per cent. This means the cost of credit may go up.

This sharp increase was driven largely by food prices, which spiked in response to the panic-buying episode preceding the partial lockdown that was announced at the end of March 2020.

Food prices continued to increase from 8.4 per cent at the end of the first quarter to 13.9 per cent at the end of the second quarter, while non-Food inflation also rose from 7.4 per cent to 9.2 per cent, but this has been at a much slower pace than food prices.

Economist Dr. Lord Mensah in an interview with Citi Business News said aside the impact of COVID 19 which has resulted in an increase, factors such as the upcoming election and the Christmas season will make it difficult for the country to achieve the initial inflation target of 8 plus or minus 2 percent.

“With the inflation dynamic, once you start drifting getting to the end of the year, it will be difficult to come back. If you look at the seasonal dynamics of inflation, history will tell you that once we are getting to the end of the fourth quarter inflation goes up, because the christmas activities are there, and now it is  also an election year so there will be pressure on the exchange rate.”

“Remember the exchange rate itself serves as a safe haven for investment. A lot of people are going to change their money into foreign exchange with dollar as a buffer so effectively inflation is in such a way that once it feeds into the exchange rate it has its own channel that it goes up into. Effectively with all these reasons, I will say that it will be difficult to fit back in line as we targeted” he noted.

Source: Business