It’s time to review inflation target – Addison

Governor of the Bank of Ghana (BoG), Dr. Ernest Addison, has said the new rebasing of the inflation basket necessitates a review of government’s medium-term target, as the current target does not make the economy very competitive.

The current medium-term target for inflation is pegged at 8 percent, meaning, government has even outperformed, if the rebased figure of 7.8 percent is used to judge.

However, that cannot be the case as the new series, which has its reference year to be 2018, is computed to reflect current consumption trends whereas the old series does not.

What it means is that for a proper assessment of the economy, the new series must be used to compute all the historical data of inflation to determine the true rate over the years. It is against this background that the governor maintains there is the need for resetting the medium-term target for inflation, adding that, the current target makes the economy not competitive when compared with its trading partners.

“We were all quite surprised with the new rate of inflation of 7.8 percent which came about because of the rebasing. So we will try to access what that means in terms of our medium-term target and see what has to be done. We currently have a medium-term target of 8 percent, which means if we have to accept the 7.8 percent, then we are slightly below the medium-term central path of 8 percent.

“We think that maybe this is the time for us to review the optimal target for inflation for a country like Ghana. When your trade partners inflation is below 5 percent and you have 8 percent inflation then you are not competitive, so we must aim to drive inflation closer to our trading partners inflation rate.

“And if you agree with that argument, we should be looking at setting a lower medium-term target for inflation, whether it should be 5 or 6, that’s where the target should be. But I expect that by the end of this medium-term period, we would probably have to reset the target for inflation lower,” he told journalist in Accra during a press briefing.

The rebasing saw the food and non-alcoholic beverages group record a year-on-year inflation rate of 8.2 percent. Fruits and nuts (25.2%), Cereals and cereal products (10.6%), sugar, confectionery and deserts (9.0%), and ready-made food and other food products (8.3%) were the major drivers of the food inflation.

The non-food group also recorded a year-on-year inflation rate of 7.4 percent in August 2019. Alcoholic beverages, tobacco and narcotics (12.9%), transport (10.2%) and housing, water, electricity, gas and other fuels (9.9%) were the key drivers of the non-food inflation in August 2019.

At the regional level, the year-on-year inflation rate ranged from 3.9 percent for Eastern Region to 12.4 percent for Greater Accra Region. Four regions (Greater Accra, Upper West, Central and Volta) recorded inflation rates above the national average (7.8%). Eastern region recorded the least inflation rate of 3.9 percent.