Wobbly cedi drives inflation to 1 year high
Headline inflation accelerated to 9.1 percent in April as the weak cedi increased the pace of price growth in the economy.
The rate increase was the second in consecutive months -- from 8.6% in February and 8.8% in March -- and follows on the heels of consistent steep falls in the value of the local currency to the dollar.
Non-food inflation went up to 11.7 percent from 11.4 percent in March, driven by increases in all but one of the constituent sub-groups. Food inflation surged to 4.8% from 4.4%, the highest since January 2011.
Acting Government Statistician, Dr. Philomena Nyarko, at a media briefing in Accra said the current rise in inflation could be attributed to the cedi's depreciation against the dollar.
“The depreciation of the cedi has obviously impacted the inflation print,” she said.
The cedi has depreciated by nearly 10% this year against the dollar, losing as much value as it gave up for the whole of 2011. In the forex bureau market, the cedi has slipped by more than 12% since the start of the year.
The weak cedi poses risks to inflation, macroeconomic stability and economic growth, Governor Kwesi Amissah-Arthur said on April 13, when the Central Bank raised its benchmark policy rate for the second time this year to 14.5%.
The move was seen as a strategy to boost earnings on cedi assets and encourage a shift from dollar investments.
But the cedi has remained wobbly, and the Central Bank has taken further steps to stem the slide.
Looking to lure investors to cedi assets and stabilise the exchange rate, the Bank has increased yields on short-term government paper.
At its last auction, the bank hiked interest rates to levels not seen in two years. The yield on the 91-day bill rose to 15.4%, the highest since March 2010, while the 182-day bill returned 15.9% per annum.
The yields on the one- and two-year notes were 15.5% and 16% respectively, up from 14.5% and 14.8% on April 23.
Beginning May 1st, the bank said it will reintroduce short-term bills, change bank reserve requirements, and require 100 percent cedi cover for so-called vostro balances -- held by local banks on behalf of foreign banks -- to help stabilise the cedi.
“Arguably, the recent measures put in place all represent a more significant tightening than adjustments to the policy rate alone,” Head of Africa Research for Standard Chartered Bank, Razia Khan, told Reuters.
“Nonetheless, we think more policy tightening will be required as a signal of the Bank of Ghana's intent to maintain tight policy,” she said.
Samir Gadio, an analyst at Standard Bank, told the same media more monetary policy tightening could push long-term bond yields up. Ghana's most recent three-year bond auction was oversubscribed at an average yield of 14 percent.
“From a foreign investor perspective, this will eventually generate attractive re-entry points into the bond market at the 3- and 5-year tenors,” he said.
The Central Bank will sell a five-year bond in June to raise GH¢200 million from local and foreign investors, but its willingness to allow yields to rise means the interest on the bond will surpass the 14.3% paid during the last issue.
At the regional level, year-on-year inflation ranged from 6.3 percent in the Upper East and Upper West Regions to 12.1 percent in the Central Region.
Three regions, Central, Western and Ashanti, recorded inflation rates above the national rate of 9.1 percent.