Tightening of policy rate to solidify gains made in reversing upward trend in inflation
Inflationary pressures in the economy continue to remain a key concern for policymakers as they grapple with a range of macroeconomic challenges. As we approach the end of March 2023, the Monetary Policy Committee (MPC) of the Central Bank is widely anticipated to sustain the gains made in reversing the upward trend in headline inflation. In fact, many experts believe that a further tightening of the Monetary Policy Rate could help to increase the rate of decline in inflation and solidify the progress that has already been made.
According to the latest data, inflation rates in February 2023 recorded a marginal decline of 80 basis points, sustaining the reversal in the upward trend recorded in most parts of 2022. This decline was primarily driven by the food group, which recorded a year-on-year inflation rate of 59.1%, a decrease of 190 bps from the previous month. However, it is worth noting that while the Food and non-alcoholic beverages, Transport, and Housing, Water, Electricity, Gas and Other Fuels divisions all saw declines, the Transport division was the only sector that saw an increase in inflation.
Local inflation also recorded a further decline of 100 bps year-on-year, recording 49.0% for the month of February 2023. This is a positive development, but it is still significantly above the government’s target range of 6-10%. Meanwhile, imported inflation stood at 62.3% year-on-year for the month of February, indicating that the inflationary pressures in the economy are not just being driven by domestic factors. Although imported inflation recorded a marginal decline of 20 bps from the previous month, it still remains higher than the headline rate, suggesting that policymakers will need to pay close attention to this issue going forward.
On a month-on-month basis, inflation between January 2023 and February 2023 increased by 20 bps to 1.9%. While food inflation reduced month-on-month by 80 bps, non-food inflation increased month-on-month by 90 bps to record 2.0% and 1.7% respectively. Non-food imports such as Diesel and Petrol recorded month-on-month inflation of 3.0% and 13.3%, respectively. These figures indicate that while inflationary pressures are easing in some areas of the economy, there are still concerns that need to be addressed.
At the regional level, the Western North Region recorded the highest inflation rate of 63.6%, while the Volta Region recorded the lowest inflation rate of 35.4%. These regional variations highlight the need for policymakers to take a nuanced approach to tackling inflationary pressures, as different regions of the country may be experiencing different levels of inflation.
Looking ahead, it is clear that the decision of the Monetary Policy Committee in the last week of March 2023 will be closely watched by market participants and policymakers alike. Given the progress that has already been made in reversing the upward trend in headline inflation, many experts believe that a further tightening of the Monetary Policy Rate could be a prudent step in solidifying these gains. However, policymakers will need to balance this against the need to support economic growth and employment, which have also been impacted by the pandemic and other macroeconomic challenges.
While inflationary pressures in the economy appear to be easing, there are still concerns that need to be addressed. The decision of the Monetary Policy Committee in the last week of March 2023 will likely have a significant impact on the trajectory of inflation going forward, and it is important that policymakers take a nuanced and balanced approach to tackling this issue.
Currently, the monetary policy rate of the Central Bank stands at 28%.
