The decision by the Bank of Ghana to raise its Monetary Policy Rate (MPR) by a further 250 basis points (bps) is all but certain to weaken domestic growth performance beyond the second half of the year.
This is the view of an Economist and Research Lead at GCB Capital Limited, Courage Boti, who says the Bank’s rigid adherence to price stability – which has seen it raise the benchmark rate by a cumulative 1,100 bps in 10 months – coupled with a cocktail of other factors are likely to constrain economic activity in the medium term.
Despite the better-than-expected real Gross Domestic Product (GDP) growth of 4.8 percent recorded in the second quarter of the year, the analyst expects discretionary spending to be muted, given the state’s constrained fiscal position.
“The latest round of confidence surveys shows a continuous softening of consumer and business confidence, owing to the heightened inflation and cedi depreciation pressures. With the extremely hawkish monetary policy stance, the domestic cost of credit is elevated, which may undermine new investments and potentially sustain the slowing growth momentum. Additionally, we envisage strict austerity measures under a possible IMF program, which could
depress economic activity in the medium term,” he said in a commentary following the central bank’s latest decision.
“The withdrawal of fiscal and monetary support shows signs of a weakening growth pulse in 2H22 despite the surprise 4.8 percent growth in real GDP in Q2 2022. We note that the real
growth in the Composite Index of Economic Activity (CIEA) has been depressed, returning a real growth rate of 0.5 percent in July 2022, sustaining the declining trend since peaking at 39.4 percent in April 2022,” he added.
Given the emerging risks to near-term growth, with the leading indicators of economic activity showing signs of distress in the second half of the year, the economist reiterated the wider expectation of analysts that BoG would have maintained the rate at 22 percent in an attempt to balance the risks to growth, considering the sharp rise in the cost of commercial credit.
“Given the renewed risks to inflation from continuous cedi depreciation and the utility tariff hike that took effect from September 2022, as well as the simmering imported inflationary pressures, the decision is not entirely surprising, even though we believe the MPC is overly aggressive,” Mr. Boti argued.
He, however, expressed belief that the action was taken, in part, to moderate the inflationary impact of the bank’s financing of the Treasury’s deficit.
“The underwhelming revenue performance, thus far, in 2022 has complicated fiscal policy implementation, with the elevated budget rigidities leaving no room for maneuver… The fiscal limitations, the heightened depreciation pressures and the resultant spate of credit risk downgrades underpinned the persistent uncovered auctions and portfolio reversals.
This limited the government’s financing options and resulted in a significant central bank deficit financing through the first nine months of 2022. While necessary to sustain government operations, the sizeable monetisation of the deficit breaches the regulatory threshold (5 percent of revenue in the preceding year) and partly underscores the relentless inflation run,” he explained.
