Investor sentiments seen improving as inflation declines

The latest decline in consumer inflation from 10.4 percent at the end of 2020 to 9.9 percent in January is good for investor sentiments, a senior analyst with Databank Research, Courage Kingsley Martey, has said.

The decline in headline inflation to within the Bank of Ghana’s medium-term target of 8±2 percent is largely attributable to a slowdown in the growth of food prices such as vegetables, fruits and nuts.

“To start the year with a decline in inflation is good for investor sentiments on the market, as it would support the decline in treasury yields that we currently observe on the domestic market—and it also deepens confidence in the current monetary policy stance as being appropriate,” Mr. Martey said in an interview with Business24.

This year, treasury yields across the short end of the yield curve have declined. For instance, the 91-day treasury bill rate has declined year-to-date by 0.27 percentage points from 14.09 percent to 13.82 percent.

Likewise, the 182-day and 364-day treasury bill rates have declined by 0.11 and 0.04 percentage points, to 14.01 percent and 16.96 percent, respectively.

Data from the Ghana Statistical Service indicate that food inflation slowed to 12.8 percent from 14.1 percent in the previous month. However, this is still above the average over the last 12 months of 12.3 percent. With this rate, food contributed 57 percent to the total inflation.

However, Mr. Martey said there seems to be elevated volatility in food prices since the 2020 lockdown, which is yet to fully diminish from the index.

“Intermittent disruptions to the domestic supply of staples amidst the COVID disruptions to imports have been significant explanatory factors for the swings in food inflation,” the analyst explained.

“The situation emphasises the need for the authorities to quickly correct the supply-side disruption before it becomes endemic,” he said.

Vegetables continued to be a key driver of food inflation, recording a rate of 20.3 percent, although lower than last month’s rate of 24.2 percent. Fruits and nuts saw a decrease in price levels, recording -5.1 percent inflation, while fish and other seafood inflation was -0.2 percent.

The senior analyst was optimistic that headline inflation will trend towards the central 8 percent official target by the second quarter of 2021.

“However, the pace of decline in headline inflation could be slightly undermined by the rebound in crude oil prices on the world market, with Brent now crossing US$60 per barrel. This could push up ex-pump prices and pose an upside risk to non-food inflation,” Mr. Martey said.

Some other analysts have said that the higher-than-expected decline in inflation to within the central bank’s target range is likely to provide strong support for a policy rate cut at the next MPC meeting in March, subject to the outcome of February inflation, which faces immediate risks from higher crude oil prices.