Editorial: Easing inflation should see borrowing costs drop

A common belief held among economic and financial pundits is, inflation has strong influence on the value of financial assets.

Cost of government short-term borrowing is projected to decrease in second half of the year, coinciding with an anticipated decline in inflation. Interest rates tumbled once again across the yield curve, in line with falling inflation.

Treasury bill (T-bill) yields resumed their decline following a 190 basis points (bps) decrease in the annual inflation rate to 23.1 percent in May this year.

The 91-day yield declined 17bps to 24.87 percent, while the 182 and 364-day tenors lost 11bps each to 26.83 percent and 27.82 percent respectively.

Annual inflation in May this year (2024) fell primarily due to a significant 420 basis point drop in food inflation to 22.6 percent. Conversely, non-food inflation saw a slight increase of 10 basis points to 23.6 percent in May from 23.5 percent in April.

This figure is expected to decrease further due to a favourable base effect and the Bank of Ghana’s stringent monetary policy aimed at reducing inflation to below 20 percent by year-end.

With the above in mind, analysts predict that yields on T-bills will decline.

In the first quarter of 2024, T-bill yields across the curve shed an average of 3.49 percent, 3.63 percent and 3.61 percent for the 91-day, 182-day and 364-day T-bills respectively, amid an over-subscription of GH¢14.11billion.

Treasury underperformed in last week’s auction by a margin of 1.36 percent, as investors submitted total bids below the GH¢4.9billion target. Nevertheless, the Treasury accepted all bids – exceeding the matured bids by 4.84 percent and reflecting a target coverage ratio of 0.99 times.

Treasury plans to raise GH¢3.56billion today (June, 21) through the issuance of 91-day, 182-day and 364-day bills to support refinancing GH¢3.35billion in maturing bills.

Thus, Treasury yields are expected to continue declining on the back of a 90 basis points decrease in headline inflation. The annual inflation rate fell to 23.1% in May 20224 from 25.0%, largely due to a sharp decline of 420 basis points in food inflation to 22.6%.

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