Further policy rate hikes unlikely, but depends on inflation outcome – experts


Market watcher, Constant Capital, is predicting that further policy rate hikes for the rest of this year remain unlikely, following the cumulative 750-basis points hike; however, this is dependent on inflation outcomes.

In the first half of the year, the Monetary Policy Committee (MPC) of the Bank of Ghana hiked the policy rate by 450bps to 19 percent. However, with concerns of a subdued economic recovery in Q1-2022, the MPC maintained the policy rate at 19 percent at the meeting in July 2022 to support economic growth.

Compelled by the worsening macroeconomic conditions, the central bank made an urgent monetary policy intervention and increased the policy rate by an unprecedented 300bps to 22 percent, resulting in a cumulative rate hike of 750bps this year. Layering this action, the central bank hiked the banks’ reserve requirement ratio by 300bps to 15 percent, to be implemented in three tranches to dispense a more aggressive response to the current inflationary trajectory.

This follows downgrades by the credit rating agencies which foretell a worse economic environment.

Nonetheless, Constant Capital, a broker-dealer, in its analysis of the decision made by the MPC during its emergency meeting, said: “Further policy rate hikes for the rest of the year, although unlikely, will largely depend on whether or not inflation peaks in line with our current expectations”.

The market expects that the local currency bond (LCY) yield curve to trend higher to reflect the increase in the policy rate, which will put additional pressure on government’s already elevated cost of debt. “Bonds could trade within the 33 to 38 percent band due to the upward rate guidance. Friday’s money market auction should particularly see a steep increase in short-term yields,” the broker-dealer projected.

Capital reserve requirement hike

Senior Analyst with Databank, Courage Kingsley Martey, predicted that as much as GH¢6billion could be drained from the banking system following the Bank of Ghana’s decision to hike the capital reserve requirement (CRR) for banks for the second time this year.

Cumulatively, the BoG is implementing a 700bps CRR, starting with an initial upward adjustment of 400bps announced in March, driving the rate above the pre-pandemic level of 10 percent. At the time, Databank forecasted a GH¢5billion drain from the banking system. The recent hike will add between GH¢1.5billion and GH¢2billion to be drained from the banking system on every percentage point in the CRR, beginning from September.

According to the market analyst, the market could start seeing banks immediately recalibrating their liquidity needs, bringing forward the impact of the CRR hike earlier than the implementation date.

In effect, the implementation of the twin policy – policy rate and CRR hikes – by the BoG will further drain cedi liquidity from the economy, control spending, and help curtail the rising inflation and re-anchor expectations. “We perceive consumer prices will remain elevated throughout the year, and will begin to recede from Q1 and Q2 of 2023. Though price stability is supportive for economic growth, we think this scenario will play out in the medium term,” Apakan Securities anticipates in its outlook.

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