BoG reaffirms single digit inflation for 2013

The Central bank has reaffirmed its stands on a lower end of year inflation for 2013 based on its own econometric models. According to the Central Bank, inflation is expected to decline steadily and remain within the target band of 7-11 percent by the end of 2013.

According to the survey, there are risks to the 2013 inflation projections. The current conditions suggest both upside and the downside inflationary risks in the coming months. While the direction of some macro indicators suggests low inflationary pressures, other indicators point to potential upward pressures on prices.


Slower pace of growth in money supply, relative stability in the exchange rate and possible unwinding of the fiscal imbalance in 2013 may dampen inflationary pressures in the coming months.


The latest surveys by the Bank show declining consumer and business inflation expectations, and declining trends in core inflation which went up significantly in the early part of 2012 have begun to trend downwards and could provide an anchor for inflation going forward.


However, the Ghana Statistical Service announced a 10.04 inflation rate for March 2013 which showed an increase from 10.0 as recorded in February in the same year. The increase was possibly due to increase in petroleum products prices.


According to the Central Bank, the possible removal of government subsidies on utility and petroleum products and subsequent upward adjustments in petroleum prices and its pass through effect on prices could induce some inflationary pressures. “We however note that in the recent past, such upward petroleum adjustments have not had severe second round effects and therefore shifts in the inflation profile have been well contained,” The bank noted.

The possible spillover effects of 2012 fiscal excesses on aggregate demand, continued real credit expansion, significant pick-up in CIEA and easing credit conditions.


Also, the management of the 2013 wage negotiations under the Single Spine Pay Policy and continued agitation on the labor front for salary arrears payment. Exchange rate movements in 2012 and pass through effects on real incomes and purchasing power in the economy.


Finally, the on-going energy sector challenges and likely cost implications if prolonged, may influence the inflation outlook.


Inflation declined sharply to 8.8 percent (9.4 percent at the end of Q3:12) in December 2012 and remained within the target band of 8.5 ±2 percent in spite of the exchange rate and fiscal challenges. Both food and non-food inflation also declined as the cyclical seasonal upward pressures in prices associated with demand for consumer items remained subdued.


In the last quarter of 2012, real sector activities picked up after a moderated pace of expansion in the earlier quarters. The real CIEA showed a quarterly growth of 5.1 percent in quarter four compared with 0.9 percent during the preceding quarter and a decline of 1.8 percent in the second quarter. Both business and consumer sentiments reflected improved optimism. Similarly, private sector credit growth remained above trend in both nominal and real terms.

These positive developments were achieved on the back of strong monetary policy measures taken by the central bank earlier in the year to counter macroeconomic risks arising from volatilities in the foreign exchange market. Nevertheless, the fiscal out-turn of 12 percent of GDP has the potential to fuel inflationary pressures and poses a major risk in the outlook.


Consequently, some fiscal consolidation is warranted to dampen pressures associated with wages and salary settlements, increased utility and fuel subsidies and outstanding payments. Also, the balance of payments deteriorated in 2012 posing additional risks to the outlook. However, positive global developments and improved prospects for oil production could counter some of the pressures on the external front.


With these developments, there is need to unwind the fiscal and current account imbalances alongside tight monetary policy to re-anchor inflation and exchange rate expectations and sustain stability.


The terms of trade (driven by cocoa, gold and oil) remain relatively firm, with the risk on the downside given global economic uncertainties. The risks to GDP growth in 2013 are on account of lower export receipts, remittances, inflows as well as the extent of fiscal consolidation. With revised assumptions of likely aggregate demand shocks from the last quarter, the effect of fiscal excesses on the domestic economy, as well as the potential upward adjustment of the prices of petroleum products, headline inflation is projected to rise during the first quarter of 2013 and peak early in the second quarter.