Year-end inflation likely to remain above 20% - DataBank projects

The year-end inflation rate is likely to remain above 20 percent, higher than earlier market projections despite the economy showing signs of recovery.

DataBank, a leading financial services firm, specifically projects that inflation could end the period as high as 23.5 percent on account of fuel prices and a troubled cedi, with 19.5 percent as the most optimistic.

This outlook stands in stark contrast to the Bank of Ghana’s (BoG) more optimistic January forecast, which anticipated inflation easing to 13 to 17 percent by close of 2024.

“We anticipate a sluggish decline in inflation, influenced by fluctuating fuel prices driven by external dynamics and a steady weakening of the domestic currency… We expect headline inflation to settle at approximately 21.5% ± 200 bps by the end of FY ’24,” Databank said in its Quarterly Strategy Report.

The inflation rate has been volatile since the start of 2024, ranging from 23.1 pecent to 25.8 percent year-on-year. Analysts attribute this trajectory to fuel price hikes and currency depreciation, which have hindered a smooth disinflation process. Databank believes the metric will see an uptick expected in the August 2024 print.

The Bank of Ghana’s Monetary Policy Committee (MPC) affirmed in a statement following it 119TH meetings that there remains some level of risk to the inflation outlook.

“On domestic price developments, there is some uncertainty regarding the year’s inflation path given recent exchange rate pressures, upward adjustment in utility tariffs and increases in ex-pump fuel prices,” said BoG Governor Dr. Ernest Addison.

He noted that these developments have resulted in a slightly elevated inflation profile for the year.

“Even though inflation is expected to remain within the target year band, the risks are tilted slightly on the upside. This will require maintaining the strong monetary policy stance supported by strong fiscal consolidation efforts – including remaining vigilant to ensure that end-year inflation objectives are achieved,” he said.

The cedi’s recent 7.57 percent monthly depreciation against the US dollar has exacerbated import costs, contributing to a sharp 3.2 percent month-on-month inflation spike in May. This development has forced the central bank to maintain its benchmark interest rate at a steep 29 percent for the fourth consecutive time, despite nascent signs of economic revival.

The Composite Index of Economic Activity grew by 2.7 percent in the first quarter, up from 2.2 percent a year earlier while the Purchasing Managers’ Index edged higher, indicating a gradual uptick in demand-driven activities. However, these green shoots of recovery are tempered by tight liquidity conditions, with broad money growth decelerating to 31 percent from 43.1 percent year-over-year.

The International Monetary Fund’s recent US$360million disbursement under its Extended Credit Facility has bolstered sentiment regarding Ghana’s debt restructuring efforts. However, the Fund emphasises a need for continued fiscal discipline and enhanced exchange rate flexibility.

Ahead of the December 2024 general elections, concerns remain about potential spending-induced inflationary pressures. Analysts note that the central bank faces a delicate balancing act, weighing risks of stifling growth against the imperative of anchoring inflation expectations in a politically-charged environment.

The BoG’s monetary policy committee is expected to maintain its conservative stance over coming months. Economists anticipate the policy rate will remain at 29 percent to mitigate potential inflationary pressures from election-related spending.