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23.05.2007 General News

Energy, utility prices shut out of inflation tracking

By myjoyonline

The Bank of Ghana (BoG) will henceforth track underlying inflation in the economy by a new core inflation measure, which excludes energy and utility prices and selected volatile food items.

The Governor of the Bank and Chairman of the MPC, Dr. Paul Acquah at the Monetary Policy Committee's press briefing on Monday explained that the high risk of volatility in the prices of utility, energy and some selected food items makes it useful to have a core inflation measure that excludes them.

"This notwithstanding, inflation targeting is to ensure that the shocks from such volatile elements do not trigger headline inflation," he said.

The Head of Research of BoG, Dr. Ernest Addison later told B&FT that businesses and banks would have to use the new core measure in making decisions and not headline inflation which entails the volatile elements.

BoG determines the direction of monetary policy by setting the prime rate bi-monthly.

The MPC has therefore maintained the rate at 12.5 percent, the second time running since the rate was eased downwards from 14.5 percent in December last year.

The Governor cited strong funda¬mentals and positive direction of stability indicators as reasons.

He said though economic activity has been robust through the first quarter, the uncertainty around the load management and energy supply are a source of weakness in the outlook.

The Bank's composite index of economic activity (CIEA) at the end of the first quarter was up by 5.2 points over the December 2006 level of 285.7, and 21.8 percent in year-on-year terms against a trend growth of 20.9 percent.

Developments in the consumer price index over the quarter showed a decline in headline inflation by 0.7 percentage points to 10.2 percent before inching up to 10.5 percent at end of April.

The core measure of inflation which excludes energy and utility items from the consumer basket also dropped by 0.3 percentage points to 9.1 percent at the end of March 2007.

"The new core measure of inflation also followed similar trend," the Governor said.

The benchmark rate, the 91-day treasury bill rate fell by 9 basis points to 9.55 percent at the end of April while the 182-day treasury bill and one-year note fell by 27 and 60 respectively to10.26 and 12.4 percent respectively.

Despite these trends, businesses are unhappy because though base rates have moved downwards by 1.41 basis points over the period, average lending rates remained unchanged within the range 15.0 percent and 35.5 percent.

The cedi depreciated against all three major trading partners over the four months to April by 0.5, 3.7 and 4.0 percent respectively against the US dollar, the pound sterling and the euro compared with the depreciation rates of 0.2, 4.1 and 7.8 percent respectively over the same period last year, with international reserves decreasing by 8.8 percent to US$2.07bn.

"The economic fundamentals are strong, the external payments outlook remains favourable with commodity prices firm and inflows steady," Dr. Acquah said.

Credit: B&FT