10th Anniversary of Naba Martin Adongo Abilba III

Bank of Ghana begins monetary easing cycle in Q4
Dr Ernest Addison, Governor, BoG

Bank of Ghana begins monetary easing cycle in Q4 — Fitch Solutions

We believe that the Bank of Ghana (BoG)’s tightening cycle has come to an end. 

The central bank kept the benchmark interest rate on hold at 29.50 per cent at the May monetary policy committee (MPC) meeting.

As inflation will continue to moderate over the coming months, we expect that the BoG will hold it again at the next MPC meeting in July.

We anticipate that the BoG will commence a monetary easing cycle in Q423, cutting the policy rate by 200bps to 27.50 per cent by end-2023, as inflation eases towards the 20 per cent mark while economic growth weakens.

Despite that the IMF has stated that the BoG would “continue tightening monetary policy” under the Extended Credit Facility, central bank policymakers kept the benchmark interest rate on hold at 29.50 per cent at the May monetary policy committee (MPC) meeting. 

This suggests that the BoG’s tightening cycle – it has raised the policy rate by 1,500 basis points (bps) since late 2021 – has come to an end. 

In the press release accompanying the rate decision, the BoG suggested that the current policies are sufficient to “reinforce the disinflation process and reset the economy on the path of recovery”.

The dovish tone has prompted us to revise down our end-of-year policy rate forecast to 27.50 per cent - from 30.50 per cent previously – implying a 200bps cut before end-2023.

We expect that the BoG will keep the policy rate on hold at its next MPC meeting in July.

Consumer price growth, which has been on a disinflation path since January (see charts below), will continue to moderate over the coming months, allowing policymakers to refrain from hiking. 

Transport and utility inflation will decelerate thanks to easing global energy prices, while a stronger exchange rate following IMF executive board approval of Ghana’s Extended Credit Facility in May will lower short-term import costs. 

Furthermore, high base effects from sharp price increases in 2022 will keep headline inflation on a downward trajectory in the coming months.

Period of sustained disinflation ahead

In addition, a pause in monetary financing of the fiscal deficit will lower price pressures in the months ahead. 

The BoG has helped plug the wide budget shortfall as the government faced limited financing options after losing access to international capital markets in late 2021. 

This has led to a sharp increase in liquidity, with broad money supply having risen to GHS161.9bn (USD13.8bn) in April, a 53.9 per cent increase compared to a year earlier (see chart below). 

However, the government and BoG signed a memorandum of understanding in early May to cease central bank lending to the government, which will lead to a reduction in liquid assets and help lower inflationary pressures in the coming months.

End of monetary financing to slow inflation

That said, inflation will remain uncomfortably high through Q223, discouraging policymakers from loosening monetary policy at the July MPC meeting. 

We believe that the introduction of higher taxes – including the hike in value-added tax to 15.0 per cent, from 12.5 per cent before – will increase consumer prices, likely slowing the disinflation process. In addition, upward adjustments to electricity tariffs by Ghana’s Public Utilities Regulatory Commission (which increased electricity prices by 18.4 per cent y-o-y in Q223) will moderate the pace of disinflation over the coming months, keeping consumer price growth well above historical levels.

Indeed, we forecast inflation to average 35.5 per cent in 2023, which would be the highest annual average in 28 years.

Long-Term Interest Rate Trajectory

We expect that the BoG will commence a monetary easing cycle in Q423, cutting the policy rate by 200bps to 27.50% by end-2023.

Consumer price growth will continue to moderate through H223 due to a stable exchange rate and high base effects, likely falling below the central bank’s end-2023 inflation target of 29.0% around September-October.

Indeed, we forecast that inflation will fall to 20.2% by end-2023. This will see real interest rates return to positive territory in Q423, allowing policymakers to adopt a more dovish stance.

In addition, below-trend economic growth will encourage policymakers to cut interest rates towards the end of the year.

We forecast that real GDP growth will slow to 2.9% in 2023, well below the five-year pre-pandemic average of 5.3%.

Tax hikes, high inflation (particularly in H123) and restrictive financial conditions will dampen household spending and investment, while fiscal consolidation efforts will weaken government consumption. With this likely to be reflected in H123 GDP outturns (see charts below), policymakers will seek to return to a more expansionary monetary policy by late 2023.

Below-trend growth to encourage monetary easing from Q423

Ghana - Real GDP Growth, % y-o-y (LHS) & Contribution To Real GDP Growth, pp (RHS)

Note: BMI estimate/forecast (e/f). Source: Macrobond, Ghana Statistical Service, BMI

In 2024, we expect that the BoG will continue its monetary easing cycle, cutting the benchmark interest rate by 550bps to 22.00% by year-end. Inflation will continue to ease through 2024, averaging 17.1%, due to high base effects (mostly in H124), exchange rate stability and further moderation in global energy prices.

With real GDP growth remaining well-below trend on the back of fiscal consolidation efforts under the IMF programme, the central bank will likely seek to lower interest rates to stimulate economic activity.

Risks to outlook

Risks to our forecast are skewed towards higher interest rates. If external debt restructuring negotiations stagnate, investor sentiment towards Ghanaian assets will weaken, which would likely trigger another round of currency depreciation.

In this scenario, inflation would remain higher for longer, prompting the central bank to adopt a more hawkish stance than our current baseline scenario assumes.

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