By Elorm Desewu
The Bank of Ghana, (BoG) has expressed some potential risks to inflation due to the increase in the Value Added Tax (VAT) by 2.5 percent by the government.
The inflation forecast shows that in the outlook, inflation will likely peak in the first quarter of 2023 and settle at around 25 percent by the end of 2023.
According to the governor of the BoG, Dr Ernest Addison, “there are however some risks to this forecast that would have to be monitored, including additional pressures from the proposed VAT increase, and exchange rate pressures. Continued vigilance to the evolution of these potential price pressures in the outlook will be key”.
This forecast is conditioned on the continued maintenance of tight monetary policy stance and the deployment of tools to contain excess liquidity in the economy.
Inflation has remained elevated, with strong underlying inflationary pressures. Price developments suggest that the upturn of headline inflation in October 2022 was driven largely by food price pressures and to some extent additional pressures from the currency depreciation.
The headline inflation has increased further to 40.4 percent in October 2022, from 37.5 percent in September. Food inflation increased by 4.9 percentage points to 43.7 percent in October 2022 from 38.8 percent in September, while non-food inflation increased by 1.3 percentage points to 37.8 percent from 36.5 percent. Underlying inflationary pressures have also heightened further.
The Bank’s measure of core inflation, defined to exclude energy and utility prices, increased from 36.2 percent in September 2022 to 39.7 percent in October 2022, an indication of broad-based inflationary pressures. At the same time, consumer, business, and financial sector inflation expectations went up.
Interest rates on the money markets trended upwards across the spectrum of the yield curve, in line with the tightening of monetary policy stance. At the short-end of the market, the 91-day and 182-day Treasury bill rates increased to 31.53 percent and 32.61 percent respectively, in October 2022, from 12.46 percent and 13.16 percent respectively, in the same period of 2021. Similarly, the rate on the 364-day bill increased to 32.32 percent from 16.24 percent over the review period.
On the secondary market, rates on all bonds, from 2-year through to 20-years, almost doubled over the one-year review period.
The interbank weighted average rate increased to 23.98 percent in October 2022 from 12.66 percent in October 2021, consistent with the increases in the policy rate and the incremental hikes in the Cash Reserve Ratio from 12 percent in August 2022 to 14 percent in October. In tandem, the average lending rates of banks rose to 31.40 percent in October 2022 from 20.34 percent in the same period of 2021.
