Subsidy on utilities will ease inflation surge – Databank Research

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Despite inflation surging to double digits in April as a result of a spike in demand for food and other essentials in anticipation of the lockdown announcement, Databank Research says there is hope that the rate will come down due to government’s subsidy on utilities.

In late March and April, there was a mad rush for foods and other items by consumers, thereby pushing traders to take advantage of the high demand to cash in and hence drive food inflation to 14.4 percent in April 2020 – 4 percentage points higher than what was recorded in the previous month. This effectively takes food’s contribution to overall inflation to 59 percent, compared to an average of 44.4 percent recorded in the past months.

The two regions affected by the lockdown decision – Greater Accra and Greater Kumasi Metropolitan – recorded the highest prices in food inflation, 20.8 percent and 18.2 percent respectively, making it averagely 8.8 percentage points higher than other regions which didn’t experience any partial lock down. This consequently drove headline inflation to 10.6 percent against 7.8 percent in March – the highest recorded since the inflation basket was rebased in August 2019.

In its Economic Flash Notes release for April, Databank Research says the pandemic-induced inflation will ease in May, as government’s subsidy on utilities which provided three months (April-June) free water and 50 percent slash in electricity bills will start reflecting in the inflation data release by the Ghana Statistical Service (GSS).

“With the May-2020 CPI data beginning from 2nd week in April, we expect the 3-week lockdown in April to exert a lagged but modest push to the May-2020 inflation. We however expect government’s utility relief package to partly mitigate the upward pressure on May-2020 inflation,” the report said.

It however noted that closure of Ghana’s land borders remains a disruption to supply chains amid the ongoing planting season, which coupled with the seasonality of agricultural output in the second quarter of 2020 poses further heightened risk to food inflation.

Effect on policy rate

The Monetary Policy Committee (MPC) of the central bank will today announce the policy rate. At the last MPC meeting, the Committee surprisingly cut the rate by 150 basis points – mainly to ease the system so banks could have adequate liquidity to operate in this pandemic period.

But the Databank report says despite the jump in inflation which would have ordinarily triggered an increase in the policy rate – especially when the new rate is above the Bank of Ghana’s target band of 6-10 percent – it expects the Monetary Policy Committee (MPC) to hold the rate at 14.5 percent.

“While we view this as a temporary overshooting of the target band, we believe there is cause for caution on liquidity injection. We therefore expect the Monetary Policy Committee to leave the MPR unchanged,” the report said.

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