June inflation declines marginally ahead of policy rate decision

For the first time since April 2020 when the coronavirus pandemic-induced buying led to a sharp hike of general price levels for goods and services, inflation has started showing signs of decline after the food basket recorded a slower pace of rising prices.

Inflation for June 2020 recorded 11.2 percent, indicating prices increased by 0.1 percentage point slower than what was recorded the previous month. This was largely occasioned by an appreciable decline in the food and beverages basket, which has been the main factor driving up inflation over the past few months due to the hike in food items on the market.

The food and non-alcoholic beverages sector recorded 13.8 percent inflation in June compared to 15.1 percent in May. The other basket, the non-food, rather saw an increase in inflation to 9.2 percent from 8.4 percent in the same period. However, due to the weight of the food basket in calculating the consumer price index, the non-food’s high rate didn’t lead to another increase of the overall inflation.

The border closures also continue to impact on high demand for locally produced items, as inflation of imported goods was 4.7 percent while that of local goods was 13.9 percent on average.

“Even though year-on-year inflation (11.2 percent) is still higher compared to pre-COVID-19 inflation, month-on-month inflation (1 percent) and month-on-month Food inflation (0.1 percent) are lower than the previous two months. This indicates that prices did continue to rise, but not as much as the previous two months,” Government Statistician Dr. Kobina Anim said after the release.

Effect on policy rate

In April the Monetary Policy Committee of the Bank of Ghana held the policy rate at 14.5 percent, though expected, due to an upsurge in the pandemic-induced inflation. The same decision, according the Director of the Institute of Social, Statistics and Economic Research (ISSER)-University of Ghana, Professor Peter Quartey, is expected come Monday – considering conditions are not ripe now for a policy rate cut.

In an interview with B&FT, the professor said he does not expect the marginal decline in inflation rate for June to affect the Monetary Policy Committee of the Bank of Ghana’s decision to either increase or decrease the policy rate. He explained that both reducing the rate or increasing it have repercussions on the economy, and it would not be prudent for the central bank to exacerbate the current unfriendly economic environment created by COVID-19.

“The government policy is to ensure that the cost of doing business is low, and that requires inflation and interest rates to be kept at the barest minimum; especially considering the situation we find ourselves in [the pandemic]. Every government wants to stimulate their economy, and so an increase in the policy rate is not the way to go as it would increase interest rates. And again, given the situation we find ourselves in, an increase in interest rate would not stimulate the economy; rather, it would worsen our plight. So, is either the policy rate is reduced or maintained.

“But reducing the rate also has repercussions. As we are aware, there has been some capital flight lately. Because of COVID-19, some foreign investors holding local bonds started exiting the market; and that put pressure on the exchange rate. So, if you reduce the policy rate further, it will quicken the likelihood of these investors selling off their bonds and exiting the market; and this will affect the exchange rate. So personally, having looked at these, I expect that the policy rate will be maintained,” he said.