BoG hikes policy rate again to contain heat in economy; now 24.5%

Despite surge in inflation in recent months prompting expectations of another increase in policy rate, the Monetary Policy Committee (MPC) of the Bank of Ghana has, in an unexpected turn of events, pressed the pause button on the rate increment.

Amid a continuous rise in inflation, sharp depreciation of the currency and mounting debt stock, the Monetary Policy Committee (MPC) of the Bank of Ghana has, once again, hiked the policy rate by 250 basis points to ease the heat in the economy.

The decision effectively takes the policy rate to 24.5 percent, thereby making it the fourth time that the rate has been increased and makes for a cumulative 1,000 basis points this year.

Speaking at a meeting with media to announce the rate, Governor of the Bank of Ghana, Dr. Ernest Addison, highlighted risk to inflation due to continuous fuel price increments and fiscal challenges emanating from poor revenue performance as among reasons the Committee reached their decision.

“On the fiscal situation, while expenditures have been broadly on target, revenue performance has been below expectation – thus complicating fiscal policy implementation. Financing for the budget so far has predominantly been from the banking sector, with the central bank absorbing a larger share. Persistent uncovered auctions and portfolio reversals by non-resident investors continue to pose risks to financing the budget, resulting in monetisation of the budget deficit by the central bank.

“The Monetary Policy Committee recognises the fact that the current condition is sub-optimal and will be interim until agreements are reached on an IMF-supported programme. The Committee assesses that engagement with the IMF has been positive, and early conclusion of the programme discussions will help re-anchor stability.

“Inflation remains elevated and the balance of risks is on the upside. Although the forecasts are for monthly inflation to continue slowing down, the risks are on the upside – emanating largely from pass-through effects of the currency depreciation, the recent upward adjustment in utility tariffs, and rising inflation expectations. The Committee remains committed to re-anchoring inflation expectations and returning to a disinflation path,” he said.

Asked whether the persistent rise in policy rate by the MPC is yielding any benefits – given overall inflation has not been tamed, Dr. Addison said the decision is paying off, as it is reflecting in monthly inflation.

“With the issue of whether we are seeing the impact, in our view this policy [increasing the policy rate] is working. One of things we focus on is the monthly changes in inflation; and if you look at it, there is some softening of the pace at which prices are rising. That obviously suggests there is, at least, some impact on the overall prices,” he said.

We were not slow in response

Again, the governor used the opportunity to debunk comments made by the World Bank after releasing its Africa’s Pulse report – that the central bank was initially slow in addressing inflationary pressures, hence giving inflation free-rein.

In the opinion of Dr. Addison, the MPC was rather quick in tightening policy, especially when it envisioned inflation might get out of hand this year.

“If you recollect, we started this policy-tightening as far back as November 2021. It wasn’t only in January when we got locked-down out of the market that the MPC started tightening it. We had already foreseen issues of prices rising, and therefore in November 2021 we did our first tightening of the monetary policy rate.

“We were even ahead of the Fed and some of the more advanced countries in tightening our policy rate. And I believe in sub-Saharan Africa, the Bank of Ghana was one of the first central banks that moved away from easing the monetary policy stance because of the impact of covid to tightening the stance – because we could see it was about time we had a shift in policy stance, as we were moving away from impacts of the pandemic into this new regime of higher inflation rate,” he said.

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