KEY POINTS
- Ghana’s inflation slowdown to 40.1 per cent is a positive development that should be viewed cautiously.
- Global economic conditions and external shocks, including commodity prices and currency volatility, remain risks.
- Structural reforms are needed to build a more resilient economy and ensure sustained price stability.
The recent inflation rate report from Ghana indicated that the inflation rate had reduced to 40.1 per cent in August 2024, which has raised expectations for a possible cut in the interest rate by the central bank. Although the news is encouraging, especially, for consumers who have to face high prices, it is crucial to examine whether this slowdown represents a sustainable trend or a temporary respite. The Bank of Ghana has been using a hike in rates as a tool to mitigate the effects of inflation. Maybe this new report according to Bloomberg might indicate that it is time to relax and loosen the reins a little.
An encouraging sign, but not the finish line
The declaration of inflation might be good news for Ghana’s households, but it is necessary to treat these indicators with some scepticism. The Central Bank should be cautious whether this is a trend that is going to persist into the future or just a blip that happens due to fluctuations in food prices or international oil prices.
One risk is the volatility of the external environment, especially the fluctuations in the prices of the world’s commodities and currencies. Ghana’s economy is still import-dependent and this makes it sensitive to external shocks such as disruption of the supply chain. If the global oil or food prices rise again, this inflation relief could be reversed very soon.
Rate cuts: Is it a solution or a risk?
It is now on the table that the central bank may cut the rate, but is it the right thing to do at the present time? On one hand, cutting down the interest rates would mean that borrowing costs would be cut down, spending would be encouraged and business investment would be promoted which are all key to economic growth. However, a premature rate cut could lead to higher inflation, thus erasing all the efforts made by the central bank in containing inflation.
Real inflation has been above 40 percent for several months and therefore, it will be prudent for the Bank of Ghana to focus on stability for the time being. The relaxation of the monetary policy before the set targets are achieved may slow down the progress or even confuse the market. However, keeping a strict monetary policy until the inflation rate is closer to the central bank’s target could give long-term stability to the economy.
Economic outlook and global context
The deceleration of inflation rate in Ghana also comes at a time that the global economic environment has become more complicated. Low inflation rates in the global market, together with the decline in the prices of commodities, has also contributed to the decline of the inflation figures in Ghana. But there is always a possibility of a global recession or some other market factors that would mean that the costs of importing goods would go up again.
Furthermore, the situation with the Ghanaian cedi remains rather unstable, and this currency is still unpredictable. Although the recent appreciation has helped to somewhat offset the inflation rate, it is not immune to short-term fluctuations such as changes in the US monetary policy, which makes any long term forecasts uncertain. Thus, any decision made by the Bank of Ghana should consider these external variables in order not to be taken by surprise.
Prioritizing long-term stability
Therefore, Ghana’s policymakers should be very cautious given the above complexities. Price stability over the long-term should remain the focus instead of a one-time increase in GDP. This is true because as the recent history of Ghana has demonstrated, inflation can quickly get out of hand despite the numbers from August providing some relief, the structural factors such as food insecurity and energy dependence remain.
It would also be wise for the government to step up the fiscal reforms in order to solve the problems of budget deficit and high debts. Inflation control is not enough for long-term stability; what is needed are structural changes that would make the economy less vulnerable to shocks.
Measured steps toward sustained economic recovery
It is good news that Ghana’s inflation has eased in August but the move should be perceived cautiously. If the Bank of Ghana is to move in the direction of a rate cut, it should be gradual and should be supported by the data and not a trend. This should continue to be the case to make sure that the economy does not go back to high inflation especially in an environment that is uncertain globally.
It is important that the central bank and the government do not act impulsively by making hasty decisions in order to achieve short-term benefits, but instead, they should work gradually and deliberately to achieve long-term objectives.
