- Leaves no room for policy rate cut
For the first time in three years, inflation has ended the year with a double-digit figure by recording 10.4 percent in December – a development that makes it very unlikely for the Monetary Policy Committee to cut the policy rate this month.
Data published by the Ghana Statistical Service (GSS) show food prices, once again, was the main driver of inflation in December 2020 as the market reacted to high patronage of food products ahead of the Christmas season. Food inflation recorded 14.1 percent compared to 11.7 percent in November 2020, taking its contribution to overall inflation to 59.1 percent – the highest contribution recorded since April 2020 when COVID-19 started to affect prices.
Non-food inflation, on the other hand, decreased to 7.7 percent in December as compared to 8.3 percent the previous month. Inflation for locally produced items was 12.1 percent, and that of imported items was 6.1 percent in the period under discussion.
At the regional level, the overall year-on-year inflation ranged from 2.1 percent in the Upper West Region to 16.3 percent in Greater Accra Region. With the exception of Upper West Region, all regions recorded higher food inflation than non-food inflation. Compared to November, only Ashanti, Brong Ahafo and Upper West Regions had lower food inflation in December. The biggest difference was recorded in the Central Region (3.5 percent to 12.8 percent).
The 10.4 percent inflation recorded for December 2020 comes ahead of the Monetary Policy Committee’s (MPC) meeting scheduled to take place January 26-29. There was some kind of hope when inflation went back to a single-digit in November that the policy rate may be cut, should the disinflation continue. But with inflation inching-up in December, any such hope should be dismissed; at best, the rate is expected to be maintained if not increased.
If the rate is maintained again, then it will be the fifth consecutive time the central bank has done so after a 150-basis point slash in March last year – which was one of the measures it took to mitigate impacts of the coronavirus pandemic on the economy.
Besides the increased inflation that poses a threat to cuts in the policy rate, there is also the threat emanating from the fiscal front. In fact, the MPC acknowledged in its report in November 2020 that it may delay any probable reduction in the policy rate should the deficit figures continue on this trajectory.
“Fiscal policy has been a source of considerable stimulus, driven by exceptional expenditures directed toward goods and services, capital expenditures, COVID-related spending, and in the energy sector. As of July 2020, the budget deficit was higher than programmed. Indications from banking data point to a faster budgetary execution in August relative to the annual target of 11.4 percent of GDP, supported by exceptional domestic and foreign financing sources.
“The drivers of economic growth are returning to normal, with prospects for a good recovery. Monetary and fiscal policies have been supportive, providing the necessary underpinnings for the economy to withstand the negative output shock arising from the pandemic. However, this has come at the cost of moving away from the consolidation path and could pose a risk to long-term macroeconomic stability if decisive measures are not taken to define a feasible fiscal adjustment to stabilise debt,” the committee said in its last report.
