[ 2012-05-11 ]

Wobbly cedi drives inflation to 1 year high
Headline inflation accelerated to 9.1 percent in
April as the weak cedi increased the pace of price
growth in the economy.

The rate increase was the second in consecutive
months -- from 8.6% in February and 8.8% in March
-- and follows on the heels of consistent steep
falls in the value of the local currency to the
dollar.

Non-food inflation went up to 11.7 percent from
11.4 percent in March, driven by increases in all
but one of the constituent sub-groups. Food
inflation surged to 4.8% from 4.4%, the highest
since January 2011.

Acting Government Statistician, Dr. Philomena
Nyarko, at a media briefing in Accra said the
current rise in inflation could be attributed to
the cedi’s depreciation against the dollar.

“The depreciation of the cedi has obviously
impacted the inflation print,” she said.
The cedi has depreciated by nearly 10% this year
against the dollar, losing as much value as it
gave up for the whole of 2011. In the forex bureau
market, the cedi has slipped by more than 12%
since the start of the year.

The weak cedi poses risks to inflation,
macroeconomic stability and economic growth,
Governor Kwesi Amissah-Arthur said on April 13,
when the Central Bank raised its benchmark policy
rate for the second time this year to 14.5%.

The move was seen as a strategy to boost earnings
on cedi assets and encourage a shift from dollar
investments.

But the cedi has remained wobbly, and the Central
Bank has taken further steps to stem the slide.
Looking to lure investors to cedi assets and
stabilise the exchange rate, the Bank has
increased yields on short-term government paper.

At its last auction, the bank hiked interest rates
to levels not seen in two years. The yield on the
91-day bill rose to 15.4%, the highest since March
2010, while the 182-day bill returned 15.9% per
annum.

The yields on the one- and two-year notes were
15.5% and 16% respectively, up from 14.5% and
14.8% on April 23.

Beginning May 1st, the bank said it will
reintroduce short-term bills, change bank reserve
requirements, and require 100 percent cedi cover
for so-called vostro balances -- held by local
banks on behalf of foreign banks -- to help
stabilise the cedi.

“Arguably, the recent measures put in place all
represent a more significant tightening than
adjustments to the policy rate alone,” Head of
Africa Research for Standard Chartered Bank, Razia
Khan, told Reuters.

“Nonetheless, we think more policy tightening will
be required as a signal of the Bank of Ghana's
intent to maintain tight policy,” she said.

Samir Gadio, an analyst at Standard Bank, told the
same media more monetary policy tightening could
push long-term bond yields up. Ghana's most recent
three-year bond auction was oversubscribed at an
average yield of 14 percent.

“From a foreign investor perspective, this will
eventually generate attractive re-entry points
into the bond market at the 3- and 5-year tenors,”
he said.

The Central Bank will sell a five-year bond in
June to raise GH¢200 million from local and
foreign investors, but its willingness to allow
yields to rise means the interest on the bond will
surpass the 14.3% paid during the last issue.

At the regional level, year-on-year inflation
ranged from 6.3 percent in the Upper East and
Upper West Regions to 12.1 percent in the Central
Region.

Three regions, Central, Western and Ashanti,
recorded inflation rates above the national rate
of 9.1 percent.

Source - Thebftonline.com

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