Market anticipates further policy rate hike

current global conditions
Dr. Ernest Addison, Governor, Bank of Ghana, and Chairman of the Monetary Policy Committee

Market analysts anticipate an average 200 basis points (bps) hike in the policy rate by the Monetary Policy Committee (MPC) of the Bank of Ghana (BoG) at the 106th meeting, in order to address widening spread between inflation and money market rates and real policy rate.

Both monetary policy rate (MPR) at 17 percent and Treasury yields at 18.23 percent for the 91-T-bill stand lower than the current inflation rate of 23.6 percent; effectively leading to negative real returns for investors.

In an interview with the B&FT, Investment Research Analyst with Constant Capital Ghana Ltd., Edem Nick Kporku, was of the belief that a hike of at least 200bps to 19 percent is needed to address the spread between inflation and money market rates and real policy rate, which has further widened.

“I believe that the BoG will remain hawkish, although intermittent rate hikes as a one-time aggressive hike to send real rates back into positive territory may not be feasible – given the current fiscal challenges, an already high debt service burden, and its implications on growth prospects,” said the Investment Research Analyst.

“That being said, investors may have to endure these negative rates for a while; at least until inflation starts moderating later this year,” he added.

In a research policy document issued this week, the Director of Research for the Institute of Economic Affairs (IEA), Dr. J. K. Kwakye, suggested that going by the principle underlying the Inflation Targetting (IT) framework, with current inflation and future outlook being so elevated, the immediate response by the BoG should be to tighten monetary policy by raising the policy rate (PR).

According to Dr. Kwakye, the factors that should determine the PR adjustment include the wide gap between the PR (17 percent) and inflation (23.6 percent); the policy tightening by major central banks, which increases the risk of foreign currency outflows from developing and emerging market economies and could put renewed pressure on the cedi; as well as the increase in the PR by as much as 250 basis points two months ago, an increase that may not have fully exerted its impact.

“Taking all of these factors together, it may be surmised that the PR should be raised by another 200 basis points to 19.0 percent. This will help narrow the gap with inflation and also ease to some extent the risk of foreign currency outflows,” he said.

“The adjustment will also provide some assurance to the markets that the BoG is committed to addressing the resurging inflation. Anything less than this may be interpreted as a weak response, which may be of concern to the markets,” he added.

Dr. Kwakye mentioned that the BoG must buttress its decision with an effective communication strategy to make its intentions clear, so that it can rally the markets behind the decision.

Despite the call for a further policy rate hike, Senior Analyst with Databank, Courage Kingsley Martey, noted that given the current inflation levels one would not be surprised to see at least a 100bps hike in the policy rate. However, “We expect the MPC to exercise its allowable discretion to leave the policy rate unchanged until July-2022”.

He said: “We believe that the MPC’s decision to combine a 250bps policy rate hike with a 400bps hike in the Cash Reserves Ratio in March-2022 has already front-loaded the near-term policy rate hikes (as the impact of the previous PR hike is now taking full effect). So, in sum, we think that leaning against the recent aggressive measures provides sufficient basis to stay the policy rate at the current level of 17 percent until July-2022.”

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