Continuous drop in inflation favourable for economy rebound

Despite the COVID-19 impact on the economy since it struck the country in March this year, disrupting various business activities, consumer inflation has fallen to a single digit in November, 2020, hitting 9.8 percent.

In percentage terms, it represents 0.3 percentage points, which is below October 2020 figure of 10.1 percent.

According to the Ghana Statistical Service (GSS), the fall is largely due to a 0.9-percentage-point fall in food inflation to 11.7 percent. in effect, the food group contributed 53 percent to the total inflation and remains the predominant driver of year-on-year inflation. However, non-food inflation remained unchanged at 8.3 percent.

Business analyts and various industry players in the country have expressed optimism since the fall of consumer inflation in November back to a single digit, as the fall is the fourth time in a role.

In March this year, consumer Inflation stood at 7.8 percent, however, due to COVID-19 disruptions in the business activties of the country, by July 2020, it had risen sharply to 11.4 percent in July.

However, due to effective measures put in place, consumer inflation started to fall in August this year.

Data indicate that the sustained drop in inflation is favourable for the continued “dovish stance of monetary policy to support the post-COVID economic recovery”.

“With a projected double-digit budget deficit and debt ratio above 70 percent in 2020, we perceive limited scope for additional fiscal stimulus in 2021 to strengthen the economic recovery. In view of the fiscal constraint, we believe the drop in inflation strengthens the case for extended support from Bank of Ghana, using all available options in the monetary policy tool kit,” Databank Research states.

It added that the seemingly quick reversal in inflation to the central bank’s target range of 6 to 10 percent underscores the view that inflation expectations are well anchored.

“This is underpinned by the steady improvement in monetary policy credibility, restored under the 2015–2019 IMF programme and largely maintained post-reforms.”

The investment bank however cautioned that the lagged effect of the sharp growth in money supply during the fourth quarter could pose an upside risk to inflation from December to the first quarter of 2021.