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BoG forecasts decline in 2nd quarter inflation

Wed, 24 Jun 2020 Source: Daily Guide Network

The Central Bank has indicated that although headline inflation rose significantly in April, driven by panic food buying ahead of the partial lockdown as part of the Covid-19 containment measures, inflation is expected to gradually decline in the second quarter, barring unanticipated shocks.

A new report by the bank, which made this known, said baseline projection was for headline inflation to remain at the upper end of the medium-term target band of eight plus or minus two per cent to end of 2020.

Output gap (the measure of the level of capacity utilization) is projected to remain negative in the medium-term, driven by real sector expectations of weak economic activity, persistence of the current negative demand shocks, and relatively tight monetary conditions in the forecast horizon.

Under-capacity utilization (negative output gap) is projected to keep real marginal costs low in the forecast horizon. Real interest rate is expected to remain above trend with the real exchange rate remaining broadly close to fundamentals since the nominal exchange rate is projected to remain broadly stable.

Assessment of risks to the inflation outlook from global economic conditions, domestic economic activity, expected stability of the cedi, and government’s fiscal operations amid the pandemic suggests that the balance of risks to the inflation outlook are somewhat elevated in the forecast horizon.

Headline inflation surged in April 2020 to 10.6 per cent, above the bank’s inflation target band after remaining flat at 7.8 per cent for three consecutive readings (January – March, 2020).

This was the highest inflation reading since February 2018 and stems mainly from increased demand for food items from the two panic-buying episodes preceding the market fumigation exercises across the country and the partial lockdown in the two largest cities, Accra and Kumasi.

The breakdown of the consumer price index revealed a significant rise in the price of food items compared to non-food items. The sharp rise in food inflation was attributed to the two panic-buying episodes prior to the Covid-19 lockdown. Inflation for food and non-alcoholic beverages rose to 14.4 per cent in April 2020 from 8.4 per cent recorded in March, while non-food inflation recorded a modest increase of 7.7 per cent from 7.4 per cent over the same comparative period.

On a monthly basis, consumer prices increased sharply by 3.2 per cent in April 2020 compared to a 0.8 per cent rise recorded in March 2020. Food price increases accounted for this sharp surge, particularly in areas where the government ordered a lockdown to slow the spread of the virus. As a result, monthly food inflation jumped to 6.4 per cent from 1.6 per cent over the period under consideration. Non-food prices also increased by 0.8 per cent compared with a rise of 0.3 per cent in March 2020. Component analysis of the consumer basket showed that the key drivers of food inflation in April were the significant increase in price of vegetables, fruits and nuts, which recorded inflation rates of 37.0 and 20.5 per cent respectively. Within the non-food category, the uptick was driven by the rise in inflation of housing and utilities, which increased to 11.2 per cent in April 2020, from 6.7 per cent in March 2020, in year-on-year terms

Source: Daily Guide Network

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