Weak Cedi Will Undo Work To Tame Inflation - EIU

Despite a drop in last month’s inflation, the Economist Intelligence Unit (EIU) is forecasting that the local currency’s weak performance will undo the work done by the central bank to tame inflation. Average consumer prices, which dropped to a six-year low of 9 per cent last month, are being projected by the EIU in its latest country report to rise to 11 per cent this year – owing to massive pressure on the cedi.

The Bank of Ghana last year depleted its reserves to shore up the cedi; but the pressure on the cedi continues amid tightening of the US monetary policy combined with other domestic factors, making the dollar too strong for the local currency.

“We forecast that inflation will remain elevated in 2019, edging up to 11%, as the weaker cedi—combined with modest growth in private consumption—continues to drive increases in consumer prices,” the business advisory firm said.

Cedi support

The Bank of Ghana Governor, Dr Ernest Addison – speaking at last month’s MPC meeting, explained that the cedi was heavily supported with more than US$600million of international reserves to slow its depreciation to preserve the gains made by cutting the policy rate.

The bank’s interbank exchange rate as at February 14 shows the cedi had depreciated by 3.5 per cent against the US dollar, compared to the 0.0026 per cent appreciation in the same period last year.

“Although it [BoG] still has some ability to continue using its reserves to support the cedi, the BoG will struggle to continue propping up the currency in the face of mounting pressure during 2019 – suggesting further depreciation is likely,” the EIU said.

According to the BoG, Ghana’s net international reserves declined from US$4.5bn in December 2017 to US$3.85bn in December 2018.

“We maintain our existing forecast of further depreciation over the year as external and internal dynamics continue to weigh on the currency, particularly as the interest-rate cut and dwindling reserves add to downward pressure,” the EIU said.

No going back

Inflation averaged 9.8 per cent in 2018— closer to the upper end of the official target range of 6­ to 10%, but lower than the highs of over 17 per cent recorded in 2015 and 2016.

According to the EIU, inflation will remain below these high levels throughout the 2019-23 forecast period, leaving the BoG more room to cut rates (to stimulate economic activity) before consumers become concerned by inflationary pressures,

The BoG in January reduced its policy rate by 100 basis points, from 17% to 16%, in an effort to stimulate the non-oil economy and encourage lending.

“We believe that lending will pick up modestly, but the main effect will mainly be continued currency weakness and, in turn, imported inflationary pressure,” the EIU said.

Source: BFT