June inflation drop makes case for policy rate cut

The general price levels of goods and services, for the second time since the beginning of the year, has seen another drop – making a strong case for the central bank to consider a policy rate cut later this month.

Data released by the Ghana Statistical Service (GSS) show that inflation for June has decreased by 0.3 percentage points to 9.1 percent from what was recorded in May. This was occasioned by declines recorded in both the food and non-food baskets.

The year-on-year non-food inflation rate for June 2019 was 10.3 percent, compared to 10.6 percent in May; whereas that of food inflation rate for June 2019 was 6.5 percent, compared with 6.7 percent in May 2019.

Locally produced goods also continued recording rates lower than imported goods as the former recorded 8.2 percent and the latter 11.3 percent, 3.8 percentage points higher.

The June 0.3 percentage point decline in inflation comes somewhat as a reprieve for the central bank, as for two consecutive times this year it has maintained the policy rate at 16 percent due to rising inflation. Inflation rose by a 0.5 percentage point from January to April, putting the Monetary Policy Committee (MPC) on red alert -and hence the decision to stay the policy rate.

But with a 0.4 percentage point decline since April when the rate hit 9.5 percent, it provides some room for the MPC to, at least, reduce the policy rate marginally.

An economist at the University of Ghana, Dr. Ebo Turkson, also supported this position when contacted for his comments. He said he does not expect anything less than a policy rate stay in the MPC’s announcement.

“Once inflation is still declining, it makes a good case for a policy rate cut; but there are other factors that also go into deciding on the policy rate. The strength of our cedi against the dollar and other major trading currencies will also be a determining factor, so it is not just the inflation. Of course, inflation is the most important of them, and once it is declining you should expect a policy rate cut. But in the worst-case scenario, the policy rate will be maintained,” he told the B&FT in an interview.

In fact, the MPC itself said in a press statement in May, when it maintained the policy rate at 16 percent, that it will monitor events and take appropriate action regarding the policy rate decision later this month.

“On the inflation outlook, the Committee noted that the recent exchange rate pass-through has slowed the disinflation process, leading to a slightly elevated inflation profile as shown in the latest forecasts. However, core inflation remains subdued and inflation expectations fairly anchored.

“Under the circumstances, the Committee decided to keep the policy rate unchanged at 16 percent. The Committee will continue to closely monitor both global and domestic developments and stands ready to take appropriate measures, if necessary, to maintain price stability,” said the Bank of Ghana Governor, Dr. Ernest Addison.