Investment bank, GCB Capital, has noted that the increasing monetisation of the fiscal deficit posed an upside risk to inflation.
It said unless the Monetary Policy Committee (MPC) of the Bank of Ghana sustained its aggressive monetary policy stance, the average rate at which prices increase would continue to rise on account of the huge deficit financing.
It also projected inflation to rise further to around 44 per cent in November before peaking at 45 per cent in December.
It gave the warning in its October insight on the economy released last week.
Projection
The investment firm said the expected aggressive policy tightening by the MPC was needed to moderate the impact of the liquidity injection.
“Accordingly, we expect inflation around 44 per cent in November and 45 per cent in December, with inflation potentially remaining above 40 per cent through quarter one of 2023,” it said.
Inflationary forces
The projection followed the release of October data, which showed that inflation had risen to 40.4 per cent.
GCB Capital said 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,” it said.
The October consumer price index showed that food inflation, which has a weight of 43.7 per cent, quickened to 43.7 per cent.
It said the food and non-alcoholic beverages division remained the dominant driver of inflation, accounting for 20.5 per cent of the headline inflation for October.
“While the September and October inflation data windows typically reflect the favourable impact of the new food harvest on food and overall inflation, this trend was non-existent in 2022, with food prices spiking instead.
“The heavily weighted non-food inflation (with a weight of 56.3 per cent) also increased by one per cent to 37.8 per cent.
“Overall, five divisions of the inflation basket, including housing and utilities, furnishing, household equipment and maintenance and transport, recorded 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,” it said.
Cedi depreciation
Going forward, the firm said, it expected inflation to continue higher through 2022
“We expect inflation to remain elevated over the remaining data windows of 2022. The passthrough effects of the sharp cedi depreciation 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,” it said.
Implications for yields
GCB Capital said it believed the domestic market was closed to medium and long-term bond offers, at least for the remainder of 2022.
It said that 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,” it added.
Impact on monetary policy
It said besides the cost-push factors and the supply shocks, it believed that there was now a significant upside risk to inflation from the demand side.
“Underlying 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,” the document said.