Positive real returns emerge as T-Bill yields reap benefits of 18-month low inflation rate

GCB Capital Research in its analysis reports a substantial downturn in Ghana’s headline inflation, reaching an 18-month low at 26.4% year-on-year, reflecting an impressive -8.8% decline in November 2023. The principal drivers behind this notable reduction stem from both a favorable base drift and ongoing macroeconomic and structural reforms implemented across the fiscal and monetary domains.

Notably, both the food and non-food baskets experienced a marked deceleration in inflation during the November 2023 data window, with figures standing at -12.6% and -6% respectively. The culmination of these factors has contributed to real returns on Treasury bill yields turning positive, aligning with a positive real policy rate—an advantageous scenario for firmly anchoring inflation expectations.

As of the latest auction, interest rates stood at 29%, 31.1%, and 32.4% for the 91, 182, and 364-day T-Bills.

Amidst this backdrop, GCB Capital Research anticipates the continuation of the disinflation process through the first quarter of 2024, all things being equal. However, acknowledging persisting growth concerns, stringent credit conditions, and a contracting loan book due to heightened risk aversion, the monetary policy stance could cautiously pivot by March 2024 to support growth, once inflation subsides sufficiently toward the 20% mark.

Despite this potential adjustment, the Bank of Ghana is expected to maintain a judicious approach, striving to sustain a healthy and positive real monetary policy rate that effectively balances the delicate equilibrium between inflation and growth risks. T-bill yields are projected to undergo a steady decline as inflation softens and the monetary policy stance eases.

Yet, GCB Capital flags a substantial risk—a sizable deficit obligation of the government, primarily financed from the T-bill market. This poses a challenge to continuous disinflation and yield decline in the near term, necessitating disciplined fiscal measures, expenditure rationalization, and the unlocking of concessional financing to sustain the ongoing economic recovery.