Databank Analysis On Inflation and The Money Market

Year on Year inflation for the month of August released by the Statistical Services is 26.6%.

This figure is 4.5 percentage points above the July inflation of 22.1%. Inflation has been edging upwards since May 1999 when it hit a two year low of 9.4%. The non-food index increased by 41.4% whiles the food component increased by 10.9%.

This increment in the non-food index was caused by the increment in the following baskets: 85.56% in Housing and Utilities, 59.36% in Household goods, Operations and Services, 46.66% in Transport and Communication, 48.25% in Miscellaneous Goods and Services, 27.89% in Alcohol and Tobacco, and 30.98% in Clothing and Footwear.

The IMF and the World Bank have lauded the monetary authority for keeping a very tight monetary policy to fight increasing inflation, but external factors have waged heavily against these efforts. The main factors being the crude oil price increases on the world market and the rapid cedi depreciation, which affected domestic fuel and imported tradables prices with a time lag.

This was reflected in the Housing and Utilites sub-index of the CPI which contains Fuel,Power and Water having the highest increase of 85.56% and the Household goods, Operations and Services which mostly contains imported tradables increasing by 59.36%. We expect the upward trend in inflation to continue for the remaining months of the year. Therefore, for appreciable real rate of return, longer-term Government securities should have higher yields than the shorter ones. This is the characteristics of a normal yield curve, but the Ghana market has an inverted yield curve situation.

The yield on the benchmark 91-day bill decreased again this week by 8 basis points to 41.60%, from last week’s 41.68%. However the yield on the 182-day stayed at last week’s 42.39%. This is an indication of Government’s intention to restructure its domestic debt profile by increasing the yield on the longer 182-day paper. This will actually give way to product development in the money market through the redesigning of this longer bill into relatively shorter products for active secondary marketing. This trend can also afford the government some respite in its recurring interest payments on the shorter 91-day Treasury bill.

On the currency market, the parallel market rates for the Dollar continues to diverge from the interbank rate by more than ?500 signifying a 7.2% gap. This signals a residual amount of pressure on the local currency. The cedi is trading at ?7,050 to the Dollar on the parallel market as against ?6550 on the interbank. Depreciation year to date against the Dollar is now 46.55% on the interbank market. The cedi lost ?18 and ?95 against the Dollar and the Pound Sterling respectively. It was relatively stable against the other currencies. Given the low level of foreign reserves, and the pent up demand by companies to service their foreign debts, we do not expect the incoming Cocoa finance inflow to have any significant impact on the cedi depreciation.

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