GSE Week ending 19 Nov

Headline inflation has dropped from 12.9% at the end of September to 12.6% as at the end of October this year. Despite the impact of the National Health Insurance Levy and the threat of petrol prices rising, inflation has been trending downwards over the past three months on the back of a slower growth in overall prices. The food index also dropped and the non food component of the inflation index hardly showed any significant movement.

It is at this point clear that single digit inflation will not be achieved this year. 2005 will still be a challenge as oil futures look to hold above the US$45 threshold. Government will be hard pressed to maintain the subsidy on oil prices which have moved up from a monthly average of US$120 million to US$200 million. That means government is spending more on subsidizing petrol to the consumer and this will have an impact on government expenditure levels. If government is able to shore up revenues up and above budgeted increased subsidy, then the increased spending on petrol will not be passed on to the consumer and inflation will trend down further. However this can be upset by liberalization of the petroleum industry in which case Oil marketing Companies (OMCs) will sell petroleum products with subsidies removed. Should this take effect we should expect inflation to go up by the end of the first quarter and then trend down by mid-year.

In response to the favorable inflation position, the Monetary Policy Committee (MPC) of the Bank of Ghana has retained its prime rate at 18.5%. With inflation at 12.6% the expectation was that there will be a further cut in the prime rate. The T-Bill rate however stayed at 17.08% last weekend. It is clear that the MPC is being conservative to deal with any further threats that may arise from liberalization of the down stream petroleum industry.

Let's keep watching.