Excess liquidity could push inflation higher - Analyst

Current levels of excess liquidity could push inflation further above the medium-term target of 8±2 percent in early 2021, Courage Kingsley Martey, senior economist at Databank, has said.

The latest data from the Ghana Statistical Service (GSS) revealed that consumer inflation returned to double digits at the end of 2020, closing the year at 10.4 percent, from 9.8 percent in November.

This was largely driven by food inflation, which increased from 11.7 percent in November to 14.1 percent in December, contributing 59.1 percent to the total inflation.

“There’s a potential upside risk to inflation for part of the first quarter of 2021 due to the liquidity overhang in the system amidst the Yuletide demand pressures,” Mr. Martey said in an interview with Business24.

“As a response to the COVID-19 shocks in 2020, the Bank of Ghana implemented various monetary measures which resulted in strong growth in the domestic money supply. And given the slowdown in real sector activity, we had the perception that there was an excess money supply in the system and if domestic production of goods or imports do not respond quickly to the potential demand-side pressures, it could pose an upside push to inflation,” he explained.

In view of the latest increase in inflation and existing inflationary risk, some economists have projected that the monetary policy committee (MPC) of the Bank of Ghana will maintain the policy rate at 14.5 percent during the January 2021 policy meeting.

“For the 2021 outlook, we still expect headline inflation to return within the target band of 6 percent to 10 percent by FY-2021,” Mr. Martey said.

“The sharp increases in the Consumer Price Index (CPI) from April to July 2020 should provide a favourable base effect to bring down inflation during Q2-2021.”