A number of market analysts – including public policy think-tank the Institute of Economic Affairs Ghana (IEA) – do not anticipate a further hike in the Bank of Ghana’s (BoG’s) benchmark monetary policy rate (MPR) when it announces the decision of its 108th Regular Meetings on Monday, September 26, 2022 to review developments in the economy.
Their expectation is premised on the need to allow for the policy measures announced during the August 2022 emergency MPC meeting to filter through the economy; albeit there are other upside risks which are threatening to further worsen the prevailing spate of inflation.
The monetary authority at an emergency session last month raised the policy rate by an unprecedented 300 basis points (bps) to 22 percent, resulting in a cumulative rate hike of 750bps this year. In addition, it also announced a three-percentage upward adjustment in the reserve requirement ratio of commercial banks to 15 percent, all in a bid to stem the inflationary tide.
While conceding that strict adherence to the BoG’s Inflation Targetting model should see the rate go up by some 200 bps considering the current inflationary pressures, the IEA for instance believes with upside risks such as exchange rate trajectory, the price of fuel, the recent utility tariffs hike and expected increase in transportation fares, the prudent decision would be to keep the MPR unchanged.
“It has to be said that if one were following the IT principle religiously, then based on the balance of risks presented above a case could be made for increasing the PR by about 200 basis points. However, as we have argued constantly, it is also clear that the MPR alone cannot be relied on to address the current inflation crisis, especially in view of the peculiarity of its causes. If we push the PR to the limit, consequences for the real economy could be disastrous,” the IEA cautioned, while describing seasonal increases in food supply and expected foreign exchange (forex) injections as having a “transient” impact.
“Indeed, many countries around the globe have come to this realisation and are taking unprecedented measures – beyond their orthodox inflation management frameworks – to deal with what is obviously an unprecedented inflation crisis. In view of this, our expectation is that the MPC will keep the PR on hold at 22 percent,” the think-tank noted.
In a similar vein Apakan Securities, a broker-dealer, said it expects the recent hikes to reinforce the Committee’s posture to combat surging inflation and expectations.
It was however optimistic the cedi’s recent relative stability against the US dollar on the back of improved US dollar liquidity from the US$750million Afreximbank loan and expected US$1.3billion COCBOD inflow will bode well for a continuous ebbing in the Consumer Price Index (CPI) rate of growth.
“Nonetheless, there remains a significant risk to the inflation outlook in months ahead – mainly posed by the increment in utility tariffs, which accounts for more than 10 percent of the overall CPI basket,” Apakan Securities pointed out.
“Considering the recent monetary policy tightening by the central bank of Ghana during its emergency meeting in August and the expected softening of economic growth, we believe the MPC will hold the policy rate at 22 percent,” the broker-dealer stated in its commentary ahead of the MPC’s next sitting.
Similarly, analysts at Constant Capital believe the central bank will be keen to allow the policy measures announced during the emergency MPC meeting last month to filter through the economy before any further adjustments are made.
Root cause-targetting framework
With the inflation targetting framework proving inadequate to fully rein-in the predominantly supply-sided inflation, the IEA once again repeated calls for a raft of measures to address the underlying factors contributing to the high cost of living.
Citing a breakdown of the last official reading in August, when headline inflation hit 33.9 percent and was once again dominated by food, transport inflation, with embedded fuel costs and imported products which reflected effects of the exchange rate, the Institute asked that managers of the economy follow measures being introduced in other jurisdictions to cap rising costs.
“We have repeatedly pointed out the IT framework’s inadequacy in dealing with these supply and cost drivers of inflation, especially at the primary level – although we acknowledge its potential role in stemming second-round effects of these factors. The supply and cost factors should be directly targetted with appropriate policy interventions.
“To this end, we have called for collaboration between the Bank of Ghana and government to target directly the underlying causes of Ghana’s inflation. The recommended interventions aim to boost supply and/or introduce subsidies as relevant.
“Countries around the world, including major economies where inflation tends to be mostly demand-driven and where demand-management approaches such as IT may be more appropriate tools, have resorted to interventions directed at the supply factors attendant to COVID-19 and the Russia-Ukraine war.”
