The end of the year inflation rate is expected to exceed 20 percent, surpassing earlier market projections, despite indications of economic recovery.

DataBank, a prominent financial services firm, predicts that inflation could reach as high as 23.5 percent due to rising fuel prices and a struggling cedi, with 19.5 percent being the best-case scenario.

This forecast sharply contrasts with the Bank of Ghana’s (BoG) more optimistic January projection, which anticipated inflation decreasing to between 13 and 17 percent by the end of 2024.

“We anticipate a sluggish decline in inflation, influenced by fluctuating fuel prices driven by external dynamics and a steady weakening of the domestic currency… We expect headline inflation to settle at approximately 21.5% ± 200 bps by the end of FY ’24,” Databank said in its Quarterly Strategy Report.

The inflation rate has fluctuated since the beginning of 2024, varying from 23.1 percent to 25.8 percent year-on-year. Analysts attribute this trend to rising fuel prices and currency depreciation, which have disrupted the disinflation process. DataBank anticipates an increase in the August 2024 report.

Following its 119th meeting, the Bank of Ghana’s Monetary Policy Committee (MPC) stated that some risks to the inflation outlook persist.

“On domestic price developments, there is some uncertainty regarding the year’s inflation path given recent exchange rate pressures, upward adjustment in utility tariffs and increases in ex-pump fuel prices,” said BoG Governor Dr. Ernest Addison.

He noted that these developments have resulted in a slightly elevated inflation profile for the year.

“Even though inflation is expected to remain within the target year band, the risks are tilted slightly on the upside. This will require maintaining the strong monetary policy stance supported by strong fiscal consolidation efforts – including remaining vigilant to ensure that end-year inflation objectives are achieved,” he said.

The cedi’s recent 7.57 percent monthly decline against the US dollar has increased import costs, leading to a sharp 3.2 percent rise in month-on-month inflation in May. This situation has compelled the central bank to keep its benchmark interest rate at a high 29 percent for the fourth consecutive period, despite early signs of economic recovery.

The Composite Index of Economic Activity rose by 2.7 percent in the first quarter, up from 2.2 percent in the same period last year, while the Purchasing Managers’ Index also climbed, suggesting a gradual increase in demand-driven activities. However, these early signs of recovery are dampened by tight liquidity conditions, with broad money growth slowing to 31 percent from 43.1 percent year-over-year.

The International Monetary Fund’s recent disbursement of US$360 million through its Extended Credit Facility has improved sentiment regarding Ghana’s debt restructuring efforts. Nevertheless, the Fund highlights the necessity for ongoing fiscal discipline and greater exchange rate flexibility.

With the December 2024 general elections approaching, there are still concerns about the potential for spending-driven inflation. Analysts point out that the central bank is in a delicate position, needing to balance the risk of stifling economic growth with the need to control inflation expectations in a politically charged environment.

The Bank of Ghana’s monetary policy committee is likely to maintain its cautious approach in the coming months. Economists predict the policy rate will stay at 29 percent to counter potential inflationary pressures from election-related spending.