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Why consistent drop in inflation could drive down yields

Consumer inflation dropped by 30bps to 10.1% in October 2020 from 10.4% in the previous month, largely driven by a reduction in non-food inflation, which constitutes 45.3% of the inflation basket.

 The consistent drop in inflation towards the Bank of Ghana’s (BoG) target band of 6-10% could create a window of opportunity for the central bank to drive down treasury yields in the coming weeks, especially given that demand has exceeded supply in the last seven weeks. Treasury has exceeded its auction target for seven consecutive weeks. Although yields at the short-end of the curve inched up this week, they have generally dropped so far in 2020 on the back of efforts by the authorities to drive down yields earlier in the year. The authorities have been keen to drive down yields to reduce the cost of government borrowing as part of measures to reduce the debt service burden, which is nearly 50% of revenues.

 

However, despite the drop in inflation for three consecutive months, the Monetary Policy Committee (MPC) of the BoG, which is expected to hold its final meeting in 2020 next week, is likely to maintain the policy rate at 14.5%. We believe that the MPC is likely to be wary of potential upside risks to inflation during the yuletide when there could be increased spending on imported goods as well as potential desire by retailers to take advantage of the yuletide demand to hike prices.


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