BoG revises inflation forecast

By Elorm Desewu

The Bank of Ghana has revised its medium term inflation target of 8±2 percent projecting that it would return to the target band by second quarter of 2021 based on corrective fiscal measures being introduced by the government in the near term.

The Bank of Ghana’s latest forecast shows that inflation is currently above its upper limit, driven mostly by food prices. Adjusting for the unusual noise in the food inflation, the indications are that underlying inflationary pressures are stable.

“The Bank projects a return of inflation to the medium-term target band by the second quarter of 2021, conditional on corrective fiscal measures being introduced in the near-term” according to the governor of BoG, Dr Ernest Addison.

The Monetary Policy Committee maintained the policy rate at 14.5 percent due to a widened budget deficit and a residual financing gap, which requires some monetary restraint to preserve the anchors of macroeconomic stability.

There have been some pressures on headline inflation. After remaining flat at 7.8 percent in the first quarter, inflation jumped to 11.2 percent in the second quarter. This sharp increase was driven in large part by food prices, which spiked in response to the panic-buying episode preceding the partial lockdown that was announced at the end of March 2020.

Food prices continued to increase from 8.4 percent at the end of the first quarter to 13.9 percent at the end of the second quarter. Non-Food inflation also rose from 7.4 percent to 9.2 percent, but this has been at a much slower pace than food prices.

The sharp rise in inflation in the second quarter has somehow disrupted the disinflation process with a potential of prolonging the time horizon for reaching steady state inflation.