In brief
- Headline inflation declined more-than-expected to 45.0% y/y in March 2023 (-780bps) compared to the average market expectation of 50.2% (IC Insights: 49.7%).
- We believe the annual inflation for March 2023 partly reflects the benefit of a higher base effect from the food and energy price shocks occasioned by escalated geopolitical tensions and FX pressures from last year.
- Contrary to historical observation, the March 2023 CPI surprisingly contracted by 1.2% month-on-month, suggesting that the sharp decline in the headline inflation reflects more than just a favourable base effect. In our view, this could partly reflect the impact of demand destruction as the year-long price acceleration steadily weakens purchasing power and forces price reductions on items with a short shelf life.
- With the impact of the recent policy rate hike yet to filter to price developments, it appears the disinflation already found a tailwind as expected. This raises the possibility for the Bank of Ghana to take a breather on the rate hikes while observing the transmission of the last unexpected hike until the September 2023 MPC meeting.
- We expect the intensified pace of disinflation to cap the upside for yields on short-term securities while a potential IMF Board approval of Ghana’s programme request in 2Q2023 revives the downward pressure. Although the 200bps hike in the Cash Reserve Ratio for local currency deposits (14.0%) could weaken investor demand for T-bills, a start of the IMF programme will reduce the Treasury’s borrowing needs.
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