4.0 Global DevelopmentsGlobal economic activity strengthened in the second half of 2013 and is expected to improve further in 2014,largely on account of gradual recovery in advanced economies. In emerging markets and developing economieshowever, persistent structural impediments and volatile financial market conditions dampened growthsomewhat. As the recovery in advanced economies gain traction and quantitative easing tapers, the main risk tothe outlook will be the disorderly capital movements across countries.According to the IMF WEO January update, global growth is forecast at 3.7 percent in 2014, slightly higher than3.0 percent at the end of 2013. In advanced economies, growth is projected to increase from 1.3 percent in2013 to 2.2 percent in 2014. While, in emerging market and developing economies, growth is projected at 5.1percent in 2014 from 4.7 percent in 2013 and supported by stronger external demand from advancedeconomies, although domestic weaknesses remain a concern. The major risk to the growth outlook in emergingeconomies is the adverse consequences of currency stability as the US tapering takes effect.Growth prospects remain strong in Sub-Saharan Africa (SSA). Projections point to broad-based growth of 6.1percent in 2014, from an estimated 5.1 percent in 2013, reflecting the steady improvement in the globaleconomy alongside increased domestic demand. The downside risks to the regions growth outlook include thefallouts from the US tapering, volatile commodity prices and slower investments by major emerging marketeconomies.Price developments indicate subdued inflation pressures in both advanced and emerging market economiesconsistent with slower economic activity. Inflation is expected to rise steadily to 1.7 percent in 2014 from 1.4percent in 2013 in advanced economies, and remain broadly contained at 5-6 percent in emerging markets.On the international commodities market, prices of Ghanas major commodity exports softened in 2013 and areprojected to remain bearish in 2014. The average gold price is projected at $1,292 an ounce in 2014, lower than$1,411 an ounce in 2013. Brent crude oil prices are likely to average $104 in 2014, down from $108.4 perbarrel in 2013. Cocoa prices may however pick up in 2014 after moderating in most of 2013. Thesedevelopments in the external environment would have significant implications on the domestic economythrough trade and exchange rate channels and in turn on inflation outlook.

Volume 4: No.1/2014 February 2014

Bank of GhanaMonetary Policy Report

Inflation Outlook and Analysis

BANK O

F GHANA

E S T. 1 9 5 7

BOG Monetary Policy Report Vol. 4 No. 1/2014 Page 2

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Chart 1: Commodity Price Indices (2000 = 100)

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Chart 2: Headline Inflation

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Chart 3: Food and Non-Food InflationFood Non-food

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Chart 4 : Headline vs Core Inflation (Y-o-Y)

Headline Core inflation (excl. utility & energy prices)

4.1 Domestic Price Developments4.1.1 Headline InflationHeadline inflation breached the end year target of 9.0 2 percentin 2013. The rise in inflation was driven by the combined effectsof the aggregate demand pressures; effects of the upwardadjustments in petroleum (2522%) and utility (5878%)prices1; some marginal upward effects from rebasing of theconsumer price basket as well as pressure on the exchange rateresulting in higher prices of imported goods.From 10.1 percent of inflation in January, inflation rose to 10.8percent in March, and further up to 11.6 percent in June 2013 dueto a series of adjustments in petroleum prices, cost-push effects ofthe energy crisis and demand pressures resulting from theexpansionary fiscal stance in the last quarter of 2012. Thereafter,Consumer Price Inflation declined marginally to 11.5 percent inAugust reflecting the effects of the seasonal food harvest.However, further adjustments in petroleum prices, transportfares (25%) as well as utility tariffs during September andOctober resulted in a sharp increase in inflation to 13.1 percent inOctober and 13.5 percent in December 2013.The main driving factors for the rising inflation were the non-foodcomponents. Food inflation declined by 0.7 percentage points to7.2 percent by December 2013 from 8.0 percent in January, butpeaked at 8.9 percent in September. Non-food inflation howeverwent up by 6.4 percentage points in the year, having moved upfrom 11.8 percent in January to 14 percent in March, 15.1 percentin June, and further up to 18.1 percent in December 2013.4.1.2 Core InflationAll the core measures of inflation went up in 2013 suggestingsome underlying inflation pressures but this indicator would bemonitored in the coming months. The main core measure ofinflation (defined to exclude price changes of energy and utilitycosts) increased steadily to 11.9 percent in December 2013, from9.8 percent in January 2013. All the other measures of coreinflation also increased over the period indicating a build up in underlying inflation pressures. (See Table 6)1 A track back of 25% which took effect in December 2013

BOG Monetary Policy Report Vol. 4 No. 1/2014 Page 3

3.5 3.0 3.0 2.9 2.9 3.2 3.2 3.5 3.9 3.0 3.2 3.2

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Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec2011 -1.8 -1.3 -1.9 -1.6 -1.9 -2.2 -2.1 -2.4 -3.2 -3.8 -4.4 -4.92012 -5.9 -7.3 -8.2 -9.0 -14.4 -17.2 -17.7 -18.0 -17.9 -17.5 -17.4 -17.52013 -0.2 -0.3 -1.1 -1.7 -3.1 -3.4 -3.6 -3.9 -4.1 -7.4 -9.7 -14.6

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Chart 8: Growth in Real CIEA (Year-on-Year)

4.1.3 Sub Components AnalysisIn terms of components of the CPI basket, the major drivers ofinflation were food and beverages (during the first quarter),transport, and housing and utilities sub indices. Aside theadministrative price adjustments, significant contributionsfrom the other sub indices to headline inflation werereflective of the second round effects of the energy and utilityadjustments and demand pressures. On a monthly basis,housing and utilities, and transport components of the CPImainly accounted for the increases in inflation in Septemberand October, while the second round effects impacted on theother CPI components with a three months lag.4.2 Exchange Rate DevelopmentsThe imbalances in the fiscal and external sectors resulted inforeign exchange market pressures particularly during thelast quarter of 2013. The cedi depreciated by 14.6 percentagainst the US Dollar in 2013 compared to 17.5 percent in2012 and 4.9 percent in 2011.4.3 Real Sector ActivitiesProvisional estimates of the Banks updated Composite Indexof Economic Activity (CIEA) showed a moderated pace ofeconomic activity. In 2013, the real CIEA recorded a 6.8percent year-on-year growth compared to 8.2 percent growthin 2012. The main sources of growth were industrialelectricity consumption, DMBs credit to the private sector,port activity and SSNIT Contributions.The Ghana Statistical Service (GSS) revised downwards itsprogrammed growth of 8.0 percent to 7.4 percent for 2013 inSeptember, citing slower pace of economic expansion duringthe year. In the third quarter, provisional real GDP numbersreleased by the GSS pointed to a year-on-year growth of 0.3percent, down from 6.1 percent year-on-year growth in thesecond quarter. The slowdown was attributed to theshutdown of the Jubilee fields due to scheduled maintenanceas well as an unexpected drop in gold prices and production.The third quarter growth was far below expectations and poses a challenge to the attainment of the end year2013 growth projection of 7.4 percent.

BOG Monetary Policy Report Vol. 4 No. 1/2014 Page 4

4.4 Inflation Projection and OutlookAt the February 2014 Monetary Policy Committeemeeting, the Committee increased the Monetary PolicyRate (MPR) by 200 basis points to 18 percent to re-anchor inflation expectations and regain price stability.Inflation breached the upper band target of 11.0 per centfor 2013 on the back of both supply side and aggregatedemand shocks. With further cost-push pressures frompetroleum and utility prices and associated transportadjustments, fiscal imbalances and potential pass througheffects of the exchange rate depreciation, inflation is likely to remain elevated in the months ahead. Again, thelatest Bank surveys on the expectation indicators continued to point to heightened inflation expectations byconsumers, businesses and the banking sector which is likely to affect the pricing behaviour of the agents in theoutlook.Alongside these, growth prospects remain modest due to the high uncertainties surrounding commodity pricesparticularly the gold, rising cost-push factors, increased volatilities in the foreign exchange market and tightmonetary policy stance. These notwithstanding, assessments within the Bank suggest that the real GDP growthwill gradually improve from the second quarter to its trend path, and will be further supported by the onset ofgas production in the last quarter of 2014.The pace of fiscal consolidation has been slower than anticipated. The 2013 fiscal deficit is estimated at 10.2percent of GDP compared to a programmed 9.0 percent of GDP reflecting moderated but still higherexpenditures and revenue shortfalls.On the external sector, global developments with regard to commodity price movements and associatedproduction of gold and cocoa, and slowdown in private transfers has resulted in further deterioration of thebalance of payments in 2013 posing additional risks to the economy. The imbalances in the domestic andexternal balances have exerted intense pressure on the foreign exchange market with sharp depreciation of thelocal currency since the last quarter of 2013. These have worked to reinforce risks to the exchange rate andinflation outlook.The latest forecasts show an elevated CPI inflation profile through end 2014. The central projection which isdriven by the Banks average forecasts indicate that inflation is likely to remain above the target by the end of2014 but expected to return to the target band in 2015 barring any risks within the period. The mainunderlying assumption of these forecasts are the likely pass through effects of the faster pace of depreciation ofthe Cedi; the slower than anticipated fiscal consolidation; continued utility and petroleum price adjustmentsand the associated increases in transport fares.This forecast profile appears elevated than was observed at the November 2013 MPC meeting and was largelyinfluenced by the higher than expected impact of a series of supply side shocks to the economy and faster

BOG Monetary Policy Report Vol. 4 No. 1/2014 Page 5

depreciation of the Cedi. The subsequent tightening of the MPR by the MPC at the February 2014 meeting re-affirms the Banks commitment to price stability.4.5 Assessment of Risks to CPI InflationThe upside risks to inflation, identified in the earlier Inflation reports as petroleum and transport priceadjustments, utility tariff adjustments, and fiscal and exchange rate pressures have all crystallised. Hence, thehike in the MPR to mitigate the inflationary consequences of the second round effects of these pressures. TheBank has also taken further steps to streamline operations of the foreign exchange market and dampen theimpact of the foreign exchange pressures on the inflation outlook.In the central projections, inflation is expected to end 2014 above the target band but will begin to ease back tothe target range in 2015. There are risks surrounding these projections which could potentially result ininflation drifting away from the central path of the projections.Upside risks: Further depreciation of the Cedi may have direct implications on prices as well as indirect effectsthrough petroleum and utility adjustments even if we assume stable crude oil prices. Secondly, efforts by thegovernment to ensure full cost recovery of utilities and the subsequent first and second round pass througheffects to prices may heighten inflation expectations and pose risks to the inflation outlook. Finally, the slowpace of fiscal consolidation would present some demand pressures on inflation in the outlook.Downside risks: On the downside however, the tight monetary policy stance may slow the pace of creditexpansion and together with subdued growth prospects act as a dampener on prices in the immediate outlook.Again, implementation of the tight fiscal measures proposed in the 2014 budget could add some impetus to theconsolidation process and dampen inflation.4.6 ConclusionThe assessments of price developments in the economy indicate significant risks to inflation. On the downside,there is considerable uncertainty about the extent to which economic activity will slow down in the quartersahead. Weak demand growth could imply downside risks to inflation in the medium term through a highermargin of slack in the economy. However, the upside risks including exchange rate pressures and continuedadjustments of energy and utility prices may raise medium term inflation expectations. In the presentcircumstances, both upside and downside risks could affect the inflation outlook beyond the forecast horizon.

BOG Monetary Policy Report Vol. 4 No. 1/2014 Page 6

Appendix: Tables (Inflation data based on new CPI series, 2012=100)Table 1: Overall Inflation, Food and Non-Food Inflation (%)

2013Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Headline Inflation 10.1 10.4 10.8 10.9 11.0 11.6 11.8 11.5 11.9 13.1 13.2 13.5

Food Inflation 8.0 6.7 6.7 6.6 6.6 7.3 7.3 7.9 8.9 6.9 7.3 7.2

Non-Food Inflation 11.8 13.3 14.0 14.4 14.6 15.1 15.4 14.2 14.2 17.7 17.6 18.1

Table 2: Monthly Price Movements (%): All ItemsQ1 Q2 Q3 Q4

Jan Feb Mar Avg Apr May Jun Avg Jul Aug Sep Avg Oct Nov Dec Avg

2012 2.20 0.64 0.15 0.99 1.49 0.58 0.95 1.01 1.11 -0.41 -1.12 -0.14 1.23 0.66 0.80 0.89

2013 3.66 0.91 0.50 1.69 1.57 0.72 1.50 1.27 1.26 -0.72 -0.68 -0.05 2.26 0.78 1.04 1.36

Table 3: Monthly Price Movements (%): FoodQ1 Q2 Q3 Q4

Jan Feb Mar Avg Apr May Jun Avg Jul Aug Sep Avg Oct Nov Dec Avg

2012 1.89 1.17 0.00 1.02 2.80 0.00 0.75 1.18 1.71 -1.92 -4.46 -1.56 1.25 0.37 0.68 0.77

2013 5.67 0.00 0.00 1.89 2.66 0.00 1.47 1.38 1.71 -1.37 -3.62 -1.09 -0.61 0.74 0.64 0.26

Table 4: Monthly Price Movements (%): Non - FoodQ1 Q2 Q3 Q4

Jan Feb Mar Avg Apr May Jun Avg Jul Aug Sep Avg Oct Nov Dec Avg

2012 2.38 0.21 0.26 0.95 0.45 1.06 1.12 0.87 0.62 0.82 1.54 0.99 1.22 0.87 0.88 0.99

2013 2.16 1.62 0.87 1.55 0.76 1.27 1.53 1.19 0.92 -0.22 1.52 0.74 4.30 0.80 1.31 2.14

BOG Monetary Policy Report Vol. 4 No. 1/2014 Page 7

Table 5: Consumer Price Index and Major Components : Index 2012 = 100Change in Inflation(percentage points)

CPI 2012 2013 2013/2012Weight

All Items: National 100.0 8.8 13.5 4.7

Food and Beverages 43.9 5.0 7.2 2.3Housing and Utilities 8.6 13.3 35.0 21.7Transport 7.3 18.9 25.6 6.7Communications 2.7 -2.0 4.4 6.4Miscellaneous Goods and Services 7.1 11.5 17.5 6.1Medical Care and Health Expenses 2.4 5.0 10.7 5.6Furnishings, Household equipments 4.7 11.9 15.7 3.9Education 3.9 5.4 8.9 3.6Recreation and Cultural Services 2.6 9.0 11.2 2.2Alcohol and Tobacco 1.7 10.6 12.3 1.7Clothing and Footwear 9.0 16.7 18.3 1.5Hotels, Cafes and Restaurants 6.1 13.2 8.8 -4.5

Table 6: Measures of Core Inflation (%)2013

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Headline Inflation 10.1 10.4 10.8 10.9 11.0 11.6 11.8 11.5 11.9 13.1 13.2 13.5

Core 1: Inflation excl Energy andUtility

9.8 9.9 10.3 10.5 10.6 11.2 11.4 10.4 11.4 12.0 11.9 11.9

Core 2: Inflation excl Energy andUtility and Volatile Food Items

10.1 10.5 10.8 11.1 11.2 11.7 11.9 11.2 11.0 11.7 11.6 11.6

Core 3: Inflation excl Energy andUtility Volatile Food Items &Transportation

9.6 9.9 10.2 10.4 10.6 11.1 11.2 10.5 10.4 11.1 11.0 11.0

Core 4: Inflation excl All FoodItems, Energy & Utility

9.9 10.2 10.6 10.7 10.7 11.0 11.4 10.8 9.4 10.2 9.9 9.7