Headline inflation surprised when it fell sharply in January to 10.3%; year on year from 11.8% in December.
This was well below our expectations for a marginal increase to 11.9%, largely owing to base effects.
The deceleration in inflation will have been positively received by the Bank of Ghana’s MPC, which was concerned about underlying inflationary pressures at the January meeting.
It suggests that there is room for a resumption of policy easing at the March meeting.
Inflation fell sharply to 10.3% year on year in January from 11.8% in December as inflationary pressures moderated though base effects largely underpinned the decline.
Month-on-month, inflation was 1.4% in January compared with 2.8% in January 2017.
Non-food inflation fell to 12.0% year on year from 13.6% in December 2017 following more subdued increases than is the case normally in January for several larger categories, including clothing & footwear, utilities and transport.
As a result, inflation for these components fell on a year-on-year basis in January, with the most noticeable decline being that of utilities, which fell from 9.1% in December to 7.5% in January.
Similarly, food inflation, despite rising by 2.1% month on month (3.3% in January 2017), fell from 8.0% year on year in December to 6.8% in January as several sub-categories saw inflationary pressures ease.
January’s inflation print takes inflation closer to the 8% +/-2pp target range.
The Bank of Ghana’s MPC will be welcoming of the sharp drop in inflation to close to the upper limit of the target range after it expressed concern about rising underlying inflation at the January MPC meeting.
At the time, the committee unexpectedly kept its policy rate unchanged to “ensure that the inflation target horizon is maintained” and the target range is achieved.
With the outlook for the currency bullish given it is likely to be well supported by strong inflows, we expect inflation to dip into the target range by Q2 18 and remain in single digits for the remainder of the year.
The central bank revealed in January that its weighted inflation expectations by business, consumers and the financial sector declined in December and we expect expectations to decline further in the coming months.
Unless there is some upside shock to the February inflation print, which we do not anticipate, there is little reason to further delay additional policy easing at the March meeting.
The committee has so far been very cautious but we see scope for at least another 400bp in rate cuts over the next few months.
Looking at the local debt market, today’s inflation print, along with the likelihood of further policy rate cuts, suggests a continuation in the decline in yields.
That said, with yields having already fallen steadily in recent months, further downside may be limited.