May 12, 2022/Cordros Report
According to the recently released inflation report by the Ghana Statistical Services (GSS), headline inflation rose by 4.27ppts to 23.63% y/y in April (March: 19.36% y/y) – the highest print since January 2004 (28.95% y/y). The uptrend in inflationary pressure was driven by a broad-based increase across the food (+421bps to 26.64% y/y) and non-food (+424bps to 21.27% y/y) baskets. Notably, the print was higher than Cordros’ (21.67% y/y) and Bloomberg’s median consensus estimate (21.20% y/y), with the deviation stemming from a sharper than expected increase in the non-food basket. On a month-on-month basis, the consumer prices increased for the fourth consecutive month, rising by 5.17% (March: 4.02% m/m) – the highest since January 2012 (6.01% m/m).
Unsurprisingly, food prices surged by 5.81% m/m (March: 4.54% m/m), consistent with the lingering pass-through impact of (1) global shortfall in food supply exacerbated by the Russia-Ukraine conflict and (2) higher transportation fares. Accordingly, prices increased across the 15 broad food produce surveyed by the GSS safe for fish and other seafood (-46bps to 5.33% m/m) and vegetables (-299bps to 2.55% m/m). On a year-on-year basis, food prices increased to an all-time high of 26.64% in April (March: 22.43% y/y).
Similarly, the non-food inflation rose by 95bps to 4.61% m/m (March: 3.66% m/m) – significantly above the 12-month average (1.58% m/m). We believe the increment in the non-food basket is reflective of the lingering impact of currency pressures and higher global gas and energy prices. Consequently, pressures were most significant across the utilities (+243bps to 4.11% m/m), furniture & household equipment (+55bps to 9.37% m/m), clothing & footwear (+195bps to 4.69% m/m) and alcoholic beverages (+295bps to 5.32% m/m) sub-baskets.
On a balance of factors, we forecast a 4.41% m/m increase in headline inflation in May, with the unfavourable base effects in the prior year cascading to a y/y reading of 28.04%.
MPC to Lean Towards Wait and See Approach
At the March policy meeting, the Monetary Policy Committee (MPC) of the Bank of Ghana (BOG) noted that the decision to raise the Monetary Policy Rate (MPR) by 250bps was warranted given (1) significant exchange rate pressures, (2) elevated inflation, and (3) tightening in global financing conditions. Since the last policy meeting in March, we note that global financing conditions have tightened further due to the monetary policy actions of the US Federal Reserve and the Bank of England. At the same time, inflationary pressures are not showing any signs of dissipating. However, the exchange rate pressure seems to be subsiding as the GHC depreciated slightly by 0.03% against the USD between 21st March and 11th May, compared with a 15.6% depreciation rate year-to-date (21st March).
Analysing data from 2010 to date, we found that the Committee has never changed the MPR at two consecutive policy meetings. Instead, the Committee waits for at least one meeting before tweaking the MPR. Furthermore, in February 2014, when the Committee raised the key policy rate by 200bps to 18.0%, they waited till the September policy meeting before increasing the rate by 100bps despite inflationary pressures rising consistently between February and September 2014. That said, we expect inflationary pressure to peak in H2-22 and moderate afterwards, given the favourable base effects from the corresponding periods of the prior year.
Accordingly, we suspect that the Committee has frontloaded the majority of 2022E interest rate hikes to mitigate the impact of tightening global financing conditions and anchor inflation expectations back to the BOG’s medium-term target. Consequently, we expect the Committee to hold the key policy rate steady at its next policy meeting scheduled to hold between 18th and 20th May 2022.