BoG warns of inflation risks amid exchange rate pressures, rising utility costs

The Bank of Ghana (BoG) has raised concerns about the inflation outlook for the remainder of 2024, citing several economic pressures that could disrupt the stability of the inflation trajectory.

In its July 2024 Monetary Policy Report, the BoG identified the recent depreciation of the cedi, upward adjustments in utility tariffs, and rising ex-pump fuel prices as key factors contributing to the uncertainty.

These developments, the report notes, have contributed to a slightly elevated inflation profile. While inflation is still projected to remain within the target range of 17% +/- 2% by the end of the year, the central bank warns that risks are tilted to the upside, indicating potential inflationary pressures.

The BoG stressed that mitigating these risks will require a continued tight monetary policy stance, which has already been employed to combat inflation over the past year. Additionally, the report calls for strong fiscal consolidation efforts from the government. This includes maintaining a vigilant approach to other potential risks, ensuring that fiscal discipline is sustained to support the broader objective of keeping inflation within the target band.

Domestic inflation overview

Ghana’s headline inflation has seen a gradual decline over the past four months, with the latest figures for August 2024 showing a reduction to 20.4%, down from 20.9% in July. This downward trend is primarily driven by easing food inflation, which fell to 19.1% in August from 21.5% in July.

The reduction in food inflation can be attributed to improved agricultural output and a relatively stable domestic supply of key food items. However, despite these positive signs, non-food inflation continues to pose challenges. In August 2024, non-food inflation increased slightly to 21.5%, up from 20.5% in the previous month, reflecting the impact of higher utility tariffs and fuel prices on the cost of goods and services.

Exchange rate pressures and utility tariffs

The central bank highlighted exchange rate pressures as a major contributor to inflationary risks. The depreciation of the cedi, driven by external factors such as the strengthening of the US dollar and fluctuating commodity prices, has led to higher import costs. This has resulted in increased prices for imported goods, further straining consumers and businesses.

At the same time, upward adjustments in utility tariffs, particularly electricity and water, have added to the inflationary pressures, raising the cost of living for households and operational costs for businesses. These increases are expected to have a cascading effect on prices across various sectors, further complicating efforts to contain inflation.

Fuel price increases

The rise in ex-pump fuel prices is another factor contributing to inflationary concerns. Global oil prices have been volatile, and the pass-through effects of higher fuel costs have been felt in transportation, logistics, and other sectors reliant on fuel. This has the potential to drive up the costs of goods and services, particularly those dependent on transportation networks.

Outlook for rest of 2024

While the BoG remains cautiously optimistic that inflation will stay within the target band, it acknowledges that the risks are considerable. The central bank’s efforts to tighten monetary policy, including maintaining high interest rates, are aimed at curbing inflationary pressures. However, the success of these measures depends heavily on complementary fiscal policies, particularly in maintaining government spending within budgetary constraints and reducing the fiscal deficit.

The BoG emphasized the need for continued vigilance in monitoring inflationary pressures from external factors such as global commodity prices, exchange rate volatility, and domestic factors like energy costs. Achieving the end-year inflation target will require a coordinated approach between monetary and fiscal authorities, along with support from key sectors of the economy. As Ghana navigates these economic challenges, the central bank is committed to using all available tools to manage inflation and ensure macroeconomic stability. The BoG’s strategy involves balancing inflation control with economic growth, aiming to provide a stable environment for businesses and consumers while addressing the structural challenges facing the economy.