Inflation pressure still boiling

Ghana’s consumer inflation is seen breaching the Central Bank’s target in the second quarter, and possibly bucking the single-digit trend that has prevailed for the last 23 months.

In April, the annual consumer price index (CPI) grew at 9.1%, the fastest in 12 months, showing signs of the weak cedi pumping up price pressures. In March, the CPI grew at 8.8%.

The Bank of Ghana is targetting a rate of 8.5% at the end of 2012 and an annual average rate of 8.7%.

“Our forecasts point towards headline inflation averaging between 10% and 12% for the second half of this year. This could be higher if crude oil prices on the world market breach (and stay above) US$120 for a sustained period,” Nii Ampa-Sowa, Head of Research for Databank Asset Management Services Limited, told the Business & Financial Times.

The International Monetary Fund (IMF) has also forecast inflation to end the year at 9.8%, according to its latest Regional Economic Outlook for Africa report. In March, the Fund warned that Ghana’s economy is exposed to upside risks to inflation from currency depreciation and high domestic demand, as well as to a crunch of external inflows in the event of a deeper slowdown in the global economy.

The cedi has weakened on average by 10.3% against the US dollar among banks since the start of the year, while it has lost an average of 15% of its value in the forex bureau market.

Nii Ampa-Sowa said the increase in inflation in April is a sign that the weak cedi is beginning to impact prices. He said rising inflation, which can lead to higher wage demands, will create challenges on the fiscal front.

“Single-digit inflation was always going to be a challenge for the Ghanaian economy in 2012. Historically, government expenditure patterns and currency weakness have severely impacted pricing trends in election years.”

Inflation dropped to single digits in June 2010, where it has remained ever since, and has been a pillar of macroeconomic stability for close to two years. But a rise in demand for imports, a reduction in net capital inflows, and the activities of speculators have caused the cedi to fall rapidly -- putting pressure on inflation and imperilling growth.

Ghana’s real GDP expanded by 14.4% in 2011, the Ghana Statistical Service said last month, and is projected to grow at 9.4% in 2012, with industry -- especially petroleum production -- and services leading the expansion.

The Bank of Ghana has twice raised its monetary policy rate this year by 100 basis points to attract investors to cedi assets and stabilise the exchange rate. Its last hike in April took the rate to 14.5%.

It has also implemented other measures to support the cedi, including instructing banks to maintain the 9% mandatory reserves for both local and foreign currency deposits in cedis only, in addition to raising Treasury yields and introducing 30-, 60- and 270-day bills to mop up excess liquidity.

“If pricing pressures continue to rise in the near-term, the Bank of Ghana will need to implement more aggressive policies to keep it in check. This is likely to translate into higher yields on government of Ghana securities (late-teens, early twenties),” said Nii Ampa-Sowa.

The interest rate on the 91-day bill has risen to 15.6% this month from 10.3% at the end of December 2011. The interest on the 182-day bill has also gone up to 15.9% from 11.1% in the same period.

The Bank of Ghana will sell a three-year bond to raise GH¢300million from both domestic and foreign investors at an auction on Wednesday. The last three-year bond sold in February had a coupon interest of 15%, with more than half of the bids received from offshore investors.

Wednesday’s auction is seen as another intervention to stabilise the cedi by attracting dollars from foreign investors interested in the sale. A strong take-up of the issue by foreign investors will provide some cushion to the Central Bank’s reserves, which have dwindled as it supplied dollars to meet growing foreign exchange demand.

In its April outlook report, the IMF urged government to rebuild its fiscal and reserve buffers as a cushion against a deeper external crisis.