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Business News of Thursday, 10 January 2013

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Cedi Regains Strength

…Under 31 MONTHS OF SINGLE DIGIT INFLATION

The December2012 inflation of 8.8 percent announced yesterday not only shows a drop in three consecutive months (October to December) but also marks 31 consecutive months of single digit inflation in the country. This development is in clear contrast to the belief of some commentators who were less optimistic and predicted that inflation was likely to return to double-digit zone by the end of the year at the back of higher petrol and electricity tariff increases, a weaker domestic currency, and higher food prices. These commentators have got a pushback on their view of double-digit inflation by end-2012because of their over-estimation of the potential pass-through effect of the weaker cedi and higher oil prices to headline inflation.

Inflation has stabilized in single-digit in31 months due to the prudent fiscal policy of the government and continued monetary restraint which helped anchored inflationary expectations and partly to lower food prices which placed a lid on headline inflation. The drop in inflation in three months running (October to December) was mainly on account of the decline in food inflation. Food inflation, after rising steadily from 4.3 percent in February 2012 to 5.5 percent in July, fell steadily, reaching 3.9percent in December. On the other hand, non-food inflation increased from 11.2 percent in February to 12.5 percent in August before dropping to 11.6percent in December.

The decline in inflation provides concrete evidence of an economy that is growing at a fast rate. Indeed, the declining inflation has created conducive environment for businesses to plan on long term basis, thereby enhancing business investment, which has helped put the economy on a higher growth path. The decline in inflation has also supported the local currency which experienced some turbulence in the first half of 2012 to enhance investors’ confidence in it. The value of the cedi which depreciated cumulatively by 17 percent in November 2012 has since stabilized, with some intermittent periods of appreciation. Similarly, the decline in inflation in three months running up to the end of the year has meant an increase in real interest rates. This, together with the stability in the cedi has improved the attractiveness of cedi assets relative to foreign assets. The critical part of the macroeconomic equation, however, is what will happen to inflation going forward. This is important not only for growth but also for the cedi’s outlook as a high rate of inflation often leads to negative real interest rates, which together undermine confidence in the local currency.

The medium to long term outlook for inflation is more promising. With a strong economic growth forecast, tight fiscal stance, current levels of interest rates, and greater exchange rate stability, we expect inflationary pressures in the country to remain moderate and inflation to drop to 5 percent in the medium term. In the end, however, inflation will continue to be heavily influenced by food prices.

ISSUED BY ABDUL HAKIM AHMED M/LIAISON MINISTRY OF FINANCE AND ECONOMIC PLANNING

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