Inflation Surges to 21.5% Days After MPC Cuts Policy Rate – Was the Forecast Off?

Inflation in Ghana has surged to 21.5%, just days after the Bank of Ghana’s (BoG) Monetary Policy Committee (MPC) cut the policy rate by 200 basis points, an unusual sequence events that has now raised concerns about the accuracy of the central bank’s inflation forecasts. The rate cut followed a period of stability, with the policy rate unchanged since January, but the unexpected rise in inflation now casts doubt on the MPC’s decision.

In announcing the rate cut, the MPC had forecasted that inflation would continue to decline, aiming for a target range of 13-17% by the end of the year. Bank of Ghana Governor, Dr. Ernest Addison, cited a consistent drop in inflation since April as justification for the cut. “Headline inflation has declined for five consecutive months by 5.4 percentage points, and core inflation has also dropped by 6.9 percentage points,” Dr. Addison said. These trends, he added, suggested that the disinflation process was on course.

However, just three working days after the forecast, the Ghana Statistical Service (GSS) released its September inflation data, (one week earlier than it normally does) which revealed a spike in inflation for the first time since March. Year-on-year inflation increased by 110 basis points, while month-on-month inflation saw a 2.8% rise, indicating persistent inflationary pressures in the economy. Food was a main driver of the September inflation. This has prompted questions about the prudence of the policy rate cut, given the immediate upward trend in inflation.

Before the MPC’s rate cut, there had been calls for a reduction in line with global trends. Major economies like the United States and South Africa, which had kept rates unchanged since 2020, made similar cuts in September. However, The High Street Journal had cautioned that unique factors in Ghana’s economic environment might not support a significant rate cut. The Journal highlighted increased government borrowing from the domestic market, election-related spending, a weakening currency, and seasonal inflation trends as potential challenges that did not support a significant reduction in the policy rate.

Adding complexity to the situation, the International Monetary Fund (IMF) recently praised the BoG’s Forecasting Team for significant improvements in its forecasting models, following technical assistance from the IMF’s Forecasting and Policy Analysis System (FPAS) project. This multi-year initiative, which began in 2019, has reportedly strengthened the BoG’s ability to integrate model-based forecasting into its monetary policy decisions.

Despite these advancements, the rising inflation could pose challenges for the BoG’s decision. With increased government borrowing through treasury bills, election-related spending, and seasonal business activity in the last quarter, inflationary pressures are likely to persist. Further, the potential for crude oil price hikes, driven by the escalating conflict between Israel and its adversaries in the Middle East, could exacerbate inflation in the coming months.

Looking ahead, analysts and market observers are concerned about the MPC’s next move. Should inflation rise again in October, the central bank may be forced to reconsider its rate cut decision at its November meeting. This raises questions about the use of the BoG’s inflation-targeting strategy and its ability to forecast accurately in the face of evolving economic pressures.

The recent turn of events suggests that the central bank may need to balance its rate-setting decisions more cautiously, considering both domestic and global factors, to bolster public confidence its strategy to fight inflation. The spotlight is now on the MPC’s next meeting and whether it will reverse its recent decision in light of rising inflation.

Source:thehighstreetjournal.com