The increase in monetization of the fiscal deficit poses an upside risk to inflation.
According to GCB Capital and Investment Bank, unless the Monetary Policy Committee (MPC) of Bank of Ghana (BOG) adheres and maintain its aggressive monetary policy stance, prices of goods and services would continue to rise on account of the huge deficit financing.
The Investment firm stated that, the anticipated aggressive policy tightening by the MPC was needed to moderate the impact of the liquidity injection. They also projected inflation to rise from 40.4% to around 44% in November before rising again to a peak of 45% in December.
“While the long-standing supply chain disruptions and the resultant cost pressure underscored the continuous rise in inflation, new inflationary forces had emerged.
“We believe the October inflation print reflects the impact of the major utility tariff hike that took effect in September, the cedi’s slide so far in quarter four of 2022 and the surge in petroleum prices due to the depreciation effect and the associated surge in transport fares.”
GCB Capital and Investment Bank
They further explained that, the consumer price index for the month of October indicated a rise in the price of food which had a weight of 43.7% but quickened to 43.7%. The food and non-alcoholic beverages division remained the dominant driver of inflation, accounting for 20.5% of the headline inflation for October.
From their indications, there had been a rise in non-food inflation (with a weight of 56.3 per cent) by 1% to 37.8%, along with the overall five divisions of the inflation basket, including housing, utilities, furnishing, household equipment, maintenance as well as transport, recording a higher inflation rates than the national average.
“At 40.4 per cent, inflation is 3,040 basis points (bps) above the upper band of the central bank’s inflation target band, and the continuing and emerging price pressures could keep inflation elevated through the remainder of 2022.”
GCB Capital and Investment Bank
Depreciation Of The Cedi
GCB Capital and Investment Bank indicated the rate of inflation is expected to go higher over the remaining data windows of 2022, hence the passthrough effects of the sharp fall in the value of the cedi in the fourth quarter of 2022 are yet to fully filter through to general prices.
“Additionally, the more than 60 per cent hike in ex-pump petroleum prices and the consequent upward adjustment in transport fares and the passthrough to general prices will linger.
“We also expect the lagged impact of the upward utility tariff adjustments to continue, and together with the anticipated surge in consumer demand around the Yuletide season, will keep inflation higher,”
GCB Capital and Investment Bank
Implications On Yields And Impact On Monetary Policy
GCB Capital stated that , it believes the domestic market was closed to medium and long-term bond offers, at least for the remainder of 2022. This came in the midst of the increased uncertainty about the government’s approach to achieving debt sustainability.
“Given this uncertainty, we expect yields to remain elevated across the curve. Thus, the high inflation profile, the tight cedi liquidity conditions and the increasing cash preference could sustain treasury bill yields higher in the coming weeks.”
GCB Capital and Investment Bank
They as well indicated that the inflationary pressures are also showing little sign of abating, which could sustain the hawkish monetary policy stance at the November policy meeting in spite of the apparent downside risks to near-term growth.
