Market anticipates 200 bps policy rate hike

Goldman Sachs

With the Bank of Ghana serving notice of an emergency meeting of its Monetary Policy Committee (MPC) only three weeks from the conclusion of its last session, analysts are anticipating a further hike in its benchmark monetary policy rate (MPR).

In a guidance note to investors, the research arm of investment banking giant Goldman Sachs anticipates a minimum 200 basis points (bps) hike from the current rate of 19 percent.

The 200 bps raise is consistent with projections by Goldman Sachs for the July MPC, when the BoG stunned analysts by maintaining the rate – ostensibly due to a slowdown in the rate of inflation.

“We expect the MPC to announce a 200 bps policy rate hike to 21 percent and see a meaningful upside risk to this forecast, given the extent of FX and domestic financing pressures.”

“The MPC maintained the policy rate at 19 percent at its July meeting in a dovish policy surprise (consensus: 20 percent; GS: 21 percent), on account of growth headwinds and slowing sequential inflation prints.

“Since then, headline inflation (year-on-year) surprised to the upside in July and was stable in sequential terms at +3.1 percent month-on-month (+37.2 percent in annualised terms), a very elevated rate relative to the BoG’s 8 percent +/-2 percentage points  target,” the investment bank explained.

If this is realised it will represent the second-highest jump in more than seven years following the 250 bps in March this year, and mirror the 200 bps raise at the subsequent meeting in May.

While the central bank did not offer much insight into the rationale behind the meeting, only describing it as “to review recent developments in the economy”, the latest indictment on the sovereign’s instruments as seen by downgrades from major rating agencies, as well as plummeting of the cedi – especially against the US dollar – are evidently reasons.

Goldman Sachs posits: “This comes after an acceleration in the pace of depreciation for the cedi in the past two weeks – almost 10 percent against the US dollar, amounting to a cumulative 50 percent currency depreciation year-to-date.

“In our view, inflation and financial stability risks stemming from this FX weakness combined with the challenging domestic financing environment for the government – which has led the BoG to begin monetising the deficit – have prompted the call for this meeting.”

Commenting on the meeting, Senior Economist with Databank Courage Kingsley Martey said the BoG’s reaction to recent developments is a testament to its proactivity and will serve to assure the market that it is acting to restore sanity to the local economy.

He expects issues of restoring confidence in the cedi, proactive measures to mitigate impacts of the utility tariff hikes ahead of implementation, and how to re-anchor investor confidence amid the current situation to inform decisions of the Committee.

“Even though the MPC did not hint at a possible emergency meeting at the last MPC briefing, if we look back on the past two weeks to see the price shocks in the goods and currency markets we can understand the need to reconvene this emergency meeting instead of waiting until the September MPC meeting, which might cast the central bank in a negative light as a passive institution,” he said.

“Essentially, this is what you expect from an institution that wants to be taken seriously by investors. You want to be as flexible and timely in your response as best as possible to reassure the market and regain investor confidence in these uncertain times,” Mr. Martey added.


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