Headline inflation increased to 10.6% year on year in February from 10.3% year on year in January, driven largely by higher food inflation.

The rise in February’s print was broadly in line with our expectations and does not alter our view on policy rates in the year ahead, particularly as inflation is in an entrenched downtrend.

With the policy stance still tight, inflation on a declining path and growth in the non-oil economy still disappointing, we maintain our view that there is scope for at least a 100bp cut at the March MPC meeting.

Headline inflation rose to 10.6% year on year in February from 10.3% year on year in the preceding month.

This was broadly in line with our projection of 10.5% year on year and comes as the month-on-month increase was 0.9%.

Food inflation (food is the largest item in the CPI basket and makes up 43.9% of the basket) rose 1.1% month on month to record a year-on-year rate of 7.2%, up from 6.8% year on year in January.

In turn, non-food inflation rose 0.7% month on month and 12.2% year on year compared with 12.0% year on year in January.

Underlying inflationary pressures remain for larger components such as transport, where inflation rose 0.9 percentage point from January to 18.9% year on year, and housing & utilities, where inflation increased 0.2 percentage points to 7.7% year on year in February.

Categories such as clothing & footwear and furnishing & household equipment continued to record steep month-on-month increases even as their respective annual inflation rates have declined.

However, the month-on-month increases appear to be moderating across the board, which we see as an encouraging trend.

The outlook for inflation remains favourable

While the February inflation rate remains outside the 8% +/-2 percent target band, we expect it to move into the target range as early as April 2018.

Thereafter, our projections show that inflation may remain in single digits for the remainder of the year, ending it around 8.0% year on year.

While food inflation rose in February from the previous month, the 1.1% month on month rise was nearly half the monthly increase recorded in January and we expect the monthly increase to moderate further as favourable weather conditions continue to impact positively on agriculture output.

Moreover, the exchange rate has appreciated marginally against the USD since the end of 2017, further driving import costs lower.

The currency is being supported by higher average prices of Ghana’s prime commodities (gold, oil and cocoa), while expected Eurobond issuances of up to USD2.5bn would provide further support.

While the faster economic growth rate could see a rise in demand, potentially fueling inflation, we believe that aforementioned factors will dominate, which, along with strong base effects, will see a continued decline in inflation.

We expect policy easing to resume at the March MPC meeting.

The Bank of Ghana’s inflation expectations survey, showing a decline of all its main categories (businesses, consumers and the financial sector), provides further evidence that there is scope for the current policy stance to be eased.

With the next MPC scheduled for 21-23 March (press conference on Monday, 26 March), there may be concerns amongst committee members about potential inflationary pressure from transport and food, with the former being driven by firm international oil prices.

However, we do not see a reason the BoG should maintain the current stance, particularly as the non-oil economy can benefit considerably from further policy relief.

Indeed, we see scope for at least a further 100bp cut in the policy rate to 19.00% at the March meeting, with further easing in subsequent meetings.