Despite the robust GDP growth and resilience of the economy, strong fiscal discipline and monetary tightening policies were critical to tame inflation towards achieving the single digit rate, Dr Paul Acquah Governor of the Bank of Ghana, said on Tuesday.
He said: "Both policies have to be designed in such a way that initial price increases expected do not become embedded in inflation expectations."
Briefing the press on the state of the economy by the Monetary Policy Committee of the BoG, Dr Acquah said headline inflation had remained stable within a narrow band above the single digit target for the year.
Headline inflation held stable and turned in at 10.2 per cent in September compared with 10.7 per cent at the end of June 2007.
The Governor, however, explained that, to place the economy firmly on the path of continued disinflation and bring inflation into the middle single digit range within the next 18 to 24 months, fiscal consolidation was necessary in the forthcoming budget.
"This must be done along with some monetary tightening to anchor the inflation expectations to underpin financial stability and growth," he said.
Looking ahead, the Governor said the downside risks to inflation stemmed principally from the surge in crude oil prices into a trading range significantly above historical levels and its potential pass through to domestic costs.
He said ongoing alignments of the exchange rates of major currencies and the knock-on effect were an added source of potential volatility on the exchange markets.
Dr. Acquah said there was also the need to adjust energy and utility tariffs adding "all these together with fiscal stimulus and demand pressures working through the system mean a potential for build-up of inflationary pressures".
He said the bank's core inflation, which excludes price changes of energy and utility items from the basket of goods, rose by 0.7 percentage points in September to 8.2 per cent following several months of decline in the single digit range. He added that this was a signal of the underlying pressures from the energy crisis, increases in fuel prices and generally rising food prices.