Faced with incessant inflation on the back of global turbulence, analysts expect a sufficient hike – around 100 to 200 basis points – in the policy rate in order to restore the credibility of monetary policy and rein in inflation expectations.
This particular hike remains critical, since at the current levels the policy rate, which is below inflation, stood at 15.7 percent in February 2022 – undermining investor confidence in the inflation outlook.
The Monetary Policy Committee (MPC) of the Bank of Ghana last week shifted its regular meetings ahead of schedule – a clear indication of urgency to address recent economic challenges.
Sharing his expectations, Senior Analyst with Databank, Courage Kingsley Martey, mentioned in an interview with B&FT the need to increase the policy rate enough to bolster investor confidence in the inflation outlook.
“At the current level, you will notice that all the COVID-induced measures are still in force. So, we expect a significant rollback of these measures – including a hike in the policy rate to restore the credibility of the policy framework, restore a positive real return on investment, and revive investor confidence,” he said.
Pre-COVID, the policy rate was 16 percent. But with inflation at 15.7 percent, the current COVID-induced policy rate of 14.5 percent appears inconsistent with the core objective of price stability.
Addressing the cedi depreciation, Mr. Martey said: “The policy rate hike will also be important to provide a much-needed respite to the Ghana cedi – which has been on a downward spiral in recent months, with supply-side support doing little to moderate the depreciation”.
The market is of the view that the elevated crude oil prices – exacerbated by the Russia-Ukraine crisis and its effects on ex-pump petroleum prices and transport fares – are yet to be fully reflected in the inflation basket. Likewise, the recent shortage of fertiliser and increased costs in the global markets could also adversely impact food yields – leading to higher prices on food items.
Furthermore, sharp depreciation of the local currency coupled with the reduction of benchmark values are deemed to have a negative impact on the price of imported items. The Ghana cedi has suffered a composite decline in value against the three major trading currencies on the interbank FX market. Data from the BoG website indicates that as of Thursday, Mar 10, 2022, the cedi had a YTD performance of -16.9 percent, -12.8 percent, -13.3 percent against the US$, GB£, and euro respectively.
These developments Apakan Securities Ltd. perceives as major risks to inflation in the short-term.
“On the back of recent developments, I think a policy rate hike is inevitable. A hike of 100-150bps wouldn’t be shocking from my point of view,” Edem Nick Kporku, Senior Analyst with Apakan Securities Ltd., said in an interview with B&FT.
Money Market
The current policy rate at 14.5 percent means the short-term borrowing rate – 91-Treasury bill at 12.8 percent – is well below inflation, which is not economically viable.
“Lending rates cannot be lower than inflation. I therefore presume that the MPC cannot wait till the afore-scheduled date to meet and address the problem. Due to the inflation and policy rate mismatch, I suppose the MPC has to assess the risk exposure to the economy, spurred by recent developments, very quickly,” said analyst with FINCAP Securities, John Nani.
On the money market, yields averagely rose by 23bps across 91-to-364-day bills during Feb-2022 on the back of heightened inflation. “Given the high inflation record, we expect investors to further re-evaluate their yield expectations upward,” he noted. “I do not envisage Ghana’s inflation figures being any lower in the near-term. Therefore, I anticipate that the meeting will result in the MPC hiking the policy rate north of 16 percent.”
