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Inflation returns to target band in March 2023

By Elorm Desewu

Inflation is likely to return to the target band of 8+/-2 percent in March 2023, according to the Bank of Ghana, (BoG). The risks in the outlook for inflation are on the upside and include petroleum price adjustments and transportation costs, and exchange rate depreciation.

The Bank of Ghana’s latest forecast still depicts an elevated inflation profile in the near term, with inflation falling within the medium-term target band within a year.

Notwithstanding the sustained growth momentum, rising food prices, upward adjustments in petroleum prices and its effect on transport fares, and exchange rate depreciation pass-through have pushed up inflation to 15.7 percent at the end of February 2022, 5.7 percentage points outside the medium-term target band. Food inflation jumped sharply from 12.8 percent in December 2021 to 17.4 percent in February 2022, while non-food inflation jumped from 12.5 percent to 14.5 percent over the same period.

According to the BoG, the combination of tighter global financing conditions, sharp pressures on the exchange rate, and elevated inflation pose some policy challenges. Headline inflation has risen sharply to 15.7 percent in February 2022, and both headline and core inflation are significantly above the upper limit of medium-term target band. The uncertainty surrounding price developments and its impact on economic activity is weighing down business and consumer confidence.

Also, underlying inflationary pressures have increased, signalling broad-based price pressures. The Bank’s core inflation measure defined to exclude energy and utility prices, increased from 11.8 percent in December 2021 to 13.6 percent in January 2022 and further up to 15.4 percent in February 2022. Similarly, weighted inflation expectations comprising consumers, businesses, and financial sector, also picked up significantly over the period.

Fiscal policy implementation has come under strain, reflecting embedded rigidities in the fiscal framework which requires extensive structural reforms to free fiscal space to restore both fiscal and debt sustainability. Revenue performance has been slow to align with projections, while expenditure remains rigid downwards despite the strong efforts to cut expenditure by 20 percent as announced by the Government.

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