The reduction in the Communication Services Tax (CST) from 9.0 percent to 5.0 percent alongside the extension of the ‘free water’ supply to December 2020 is expected to further bring down inflation.
The Bank of Ghana (BOG) stated that the direct effect of the reduction in CST and the extension of the free water supply to the end of the year is a reduction in prices of the utilities and communication sub-components in the non-food basket, which could generate some downward pressures on headline inflation.
The Bank of Ghana stated this in its recent ‘Inflation Outlook and Analysis’ for September released on Friday, October 30, 2020.
Headline inflation is currently above the upper band of the medium-term target of 8±2 percent.
A decomposition of the inflation shows that the sharp rise in inflation from the average of 7.8 percent in the first quarter to an average of 11.0 percent in the second quarter and 10.7 percent in the third quarter of 2020, was driven mainly by supply shocks emanating from higher food prices and elevated inflation expectations.
The central bank pointed out that, the baseline forecast shows a return of inflation to the medium-term target band by the second quarter of 2021, driven by easing COVID19 related food price pressures and well-anchored inflation expectations.
However, the BOG warned that the widening budget deficit and its associated financing gap could pose risks to debt sustainability if decisive measures are not implemented to return to the path of fiscal consolidation.
Furthermore, the central bank indicated that over the next three quarters, the dynamics in headline inflation are expected to be driven by the persistence of supply shocks and some base-drift effects.
Nevertheless, the BOG stated that in quarters further ahead, inflation will be driven to the central target of the medium-term band by both lower inflation expectations and real marginal costs.
Risks to the Inflation outlook
The central bank’s assessment of risks to the inflation outlook from global economic conditions, domestic economic activity, exchange rate dynamics, and government’s fiscal policy implementation amid the pandemic suggests that the risks to the inflation outlook are broadly balanced in the forecast horizon.
Global economic conditions
More specifically, the central bank expects the subdued headline and core inflation across the globe to dampen price pressures from imported products in the medium-term.
Crude Oil prices
Crude oil prices are projected to recover due to the easing of restrictions on movement and the full compliance of agreed global crude oil production cut by OPEC+. As a result, ex-pump prices may rise in the outlook to reflect the projected increase in international crude oil prices.
Fiscal operations and government response to the pandemic
“The COVID-19 pandemic has derailed the fiscal consolidation path observed over the past three years with increased spending and revenue shortfalls. The significant financing shortfall due to unexpected health-related expenditures to contain the pandemic and the stimulus packages to boost growth may exert pressures on inflation in the medium term.
“Although fiscal developments are more likely to pose an upside risk to the inflation profile in the medium term, the existing wide negative output gap is likely to mute this risk. Nonetheless, there is an urgent need to define a feasible fiscal adjustment necessary for a return to the path of fiscal consolidation to and to ensure public debt remains at sustainable levels”.
BOG
Domestic economic activity
The Bank of Ghana stated that a sustained level in consumer and business confidence, broad-based growth in the indicators of the Composite Index of Economic Activity (CIEA) are all supportive of growth in the outlook. However, BOG noted that given that the level of activity was currently below potential, the emerging recovery is not expected to exert any significant price pressures from aggregate demand, thus should not pose risks to the disinflation process.
Headline Inflation
Consumer price inflation fell from 11.2 percent in June 2020 to 10.5 percent in August 2020 and down further to 10.4 percent in September, approaching the upper band of the medium-term target band.
The decline in inflation was driven largely by easing pressures on food prices, following the sharp rise in food prices on account of the panic-buying episodes preceding the partial lockdown that was announced at the end of March 2020.
From 13.8 percent in June, food inflation slowed down to 11.2 percent in September 2020 from 11.4% recorded in August 2020.
Year-on-year Non-Food inflation in September was 9.8%, which is lower than the 9.9% measured in August 2020 but still higher than 9.2 percent in June. This BOG said was partly driven by an increase in clothing and footwear and the housing and utilities sub-categories.
