Inflation to remain uncomfortably high throughout Q2 2023 – Fitch Solutions
Ghana’s battle with stubbornly high inflation continues to pose challenges for policymakers, deterring them from implementing much-needed monetary policy easing measures. Fitch Solutions, a renowned financial research firm, warns that inflationary pressures will remain uncomfortably high throughout the second quarter of 2023, casting doubt on the possibility of loosening monetary policy at the upcoming Monetary Policy Committee (MPC) meeting in July.
The recent introduction of higher taxes and upward adjustments to electricity tariffs are expected to exacerbate consumer price growth, impeding the disinflation process. These factors combined suggest that Ghana’s inflation trajectory is poised to deviate from historical levels, with 2023 likely witnessing the highest average inflation rate in 28 years.
Persistently High Inflation
As of April 2023, Ghana’s inflation rate stands at a significant 41.2%. Fitch Solutions forecasts that inflation will continue to hover at elevated levels, averaging 35.5% throughout the year. This worrisome trend poses substantial challenges for the economy, potentially hindering investment, dampening consumer purchasing power, and impeding long-term economic stability.
Impact of Tax Hikes and Electricity Tariff Adjustments: Fitch Solutions identifies the recent introduction of higher taxes, including the hike in value-added tax from 12.5% to 15.0%, as a key driver behind rising consumer prices.
These tax adjustments are expected to further slow down the disinflation process, compounding the challenges faced by policymakers. Moreover, Ghana’s Public Utilities Regulatory Commission has implemented upward adjustments to electricity tariffs, resulting in an 18.4% year-on-year increase in Q2 2023. This move is likely to moderate the pace of disinflation in the coming months, exacerbating the already elevated consumer price growth.
Monetary Policy Outlook
Fitch Solutions anticipates that the Bank of Ghana will adopt a cautious approach in its next MPC meeting, maintaining the policy rate in light of ongoing inflationary pressures. The gradual easing of inflation is expected to play a crucial role in shaping this decision.
Factors such as decreasing transport and utility costs, resulting from lower global energy prices, as well as a stronger exchange rate following the approval of Ghana’s Extended Credit Facility by the IMF’s executive board, are likely to support the central bank’s decision to keep the policy rate steady for now.
Role of Reduced Monetary Financing
Another significant factor that Fitch Solutions highlights is the expected reduction in price pressures resulting from a pause in monetary financing of the fiscal deficit. This shift in monetary policy strategy is aimed at curbing inflationary pressures and alleviating the burden on the economy.
By reducing the monetary financing of the fiscal deficit, policymakers hope to achieve a more balanced approach to economic stability and fiscal discipline. This shift is expected to have a positive impact on inflation moderation in the coming months, albeit with its effects taking time to materialize.
Ghana’s struggle with high inflation poses formidable challenges to policymakers as they strive to implement effective monetary policy measures. The introduction of higher taxes and upward adjustments to electricity tariffs contribute to the persistence of elevated consumer price growth, complicating the disinflation process.
While the Bank of Ghana is likely to maintain the policy rate in the upcoming MPC meeting, the gradual easing of inflationary pressures and reduced monetary financing of the fiscal deficit offer glimmers of hope for the future. However, it is crucial for policymakers to closely monitor the evolving economic landscape and employ targeted measures to address the underlying causes of inflation, ensuring sustainable economic growth and stability for Ghana.
