Consumer inflation sees significant drop; set to impact Treasury, interest rates

Consumer inflation saw a significant drop in November 2023 – dropping to 26.4 percent from the previous month’s 35.2 percent. The 8.8 percentage point decline falls in line with market forecasts, providing a welcome respite amid high and persistent inflation rates.

This remarkable downturn comes as a favourable outcome – especially considering that government’s end-2023 inflation target stands at 31.3 percent, as outlined in the 2024 budget.

The noteworthy decrease in inflation is primarily attributed to favourable base effects in conjunction with the heightened Consumer Price Index (CPI) levels recorded during the corresponding period last year. This sustained downward trend underscores a continued disinflation process, steering away from the prolonged 30 percent range that prevailed for a consecutive two-month period.

The process of disinflation was initiated when inflation scaled down from 43.1 percent in July 2023 to 40.1 percent in August. Throughout the first half of 2023 inflation exhibited signs of easing, commencing at a peak of 54.1 percent in December 2022 and gradually declining to 41.2 percent by April 2023. However, there was a momentary uptick of 100 basis points in May… briefly interrupting the overall downward trend.

The key drivers are:

• Food inflation dropped by 12.6 percentage points from 44.8% in Oct to 32.2% in November
• Similarly, non-food inflation dropped by 6 percentage points from 27.7% in Oct to 21.7% in November;
• imported inflation dropped by *9.9* percentage points from 37.0% in Oct to 27.1% in November.

Government intervention that contributed to this favourable inflation outcome include (a) the stability in the exchange rate with the cedi depreciating cumulatively against the dollar by 7.2% from Feb to date compared to 47.6% for the same period last year (b) significant progress in fiscal consolidation with the primary deficit (on commitment basis) reducing from 4.3% of GDP in Jan-Sept 2022 to 0.9% of GDP in Jan-Sept 2023, (c) the tight monetary policy stance of BoG, (d) relatively good performance Agriculture production in H1 2023 6.3% compared to 4.3% in H1 2022

Since its pinnacle at 54.1 percent in December 2022, headline inflation has witnessed a cumulative decline of 27.7 percent. Notably, both non-food and food inflation have markedly decreased – by approximately 32.2 percent and 21.7 percent respectively, underscoring the ongoing disinflationary trend.

Market sentiments had previously anticipated a substantial decline in the annual inflation rate based on the dynamics of inflation. Following this latest announcement, dynamics in the treasury market are poised for a shift. Treasury bill rates ranging from 29.58 percent to 33.46 percent for durations spanning from 91-days to 364-days indicate a positive return on the market.

This development further solidifies market sentiments, suggesting that nominal yields might have reached their zenith – ranging between 29.97 percent to 33.70 percent across the T-bill curve. Expectations for a yield correction loomed large, especially considering adjustments made in the T-bill auction process – including pre-auction price guidance provided by the Treasury through Primary Dealers (PDs).

We are on course for stability with growth

We expect that going forward, this rapid disinflation process will bode well for interest rates, thereby reducing the cost of borrowing for businesses and support the inclusive growth agenda. Our goal is stability with growth and we are certainly on course for that,Finance Minister ,Ken Ofori Atta commented

The favourable turn in the market is likely to bode well for the Treasury, given its intention to domestically finance approximately GH¢61.4billion; constituting 99.3 percent of total deficit financing for 2024.

As of December 11, 2023, the Treasury has issued GH¢141.99billion on the money market, surpassing the GH¢129.31billion target. Investors tendered GH¢146.13billion during this period. Notably, GH¢29.31billion of the total issuances accounted for net issuance (new debts) aimed at supporting the 2023 budget due to government’s inability to access international capital markets.

The substantial decline in consumer inflation is poised to significantly influence the market landscape, particularly impacting Treasury rates and investor sentiments as the economy navigates these changing dynamics.

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