- Decisions to bridge inflation target gap
- Anticipates return to target band in 4 to 5 years
- Cost of borrowing to go up
The Monetary Policy Committee (MPC) of the central bank has further raised the policy rate by 100 basis points to 28 percent from 27 percent, in an effort to drive inflation onto a downward path.
“In the interim, the MPC sees the need to remain vigilant and moderate liquidity in the system to underpin macroeconomic adjustments taking place to drive inflation onto a downward path. Under the circumstances, the Committee decided to increase the policy rate by 100 basis points to 28 percent,” said Governor of the Bank of Ghana (BoG) and Chairman of the MPC, Dr. Ernest Addison.
During 2022, the BoG cumulatively increased the benchmark policy rate by 1,250 basis points to 27 percent – the highest in almost 2 decades, as the MPC remains resolute in its stance through Q1-2023 until inflation shows signs of moderation and implementation of other available monetary tools to control money supply and rein-in inflation.
Although the central bank expects inflation to peak in Q1-2023, Governor Addison noted it sees inflation returning to the medium-term inflation target band of 8±2 percent in the next four years, amid the International Monetary Fund (IMF) programme.
“We are focused on our mandate, and trying as much as possible to make policy decisions which help bridge the inflation gap. In that context, direction of inflation is not only going to be determined by the policy rate but a whole lot of other factors – including the macroeconomic framework which we have described.
“If you look the timeframe, we’re looking at three to four years. This is what the IMF programme is designed to do. During that timeframe, we expect to bring inflation down to the target of a single digit, thus a medium-term inflation target band of 8±2 percent. So, this is really the objective of monetary policy over the next three to four or five years,” the Governor said.
A final agreement with the IMF following the staff level agreement (SLA) is however dependent on the Domestic Debt Exchange Programme and external debt restructuring, which when concluded and the necessary financial commitment obtained, will allow the SLA’s presentation to the IMF Board.
The MPC is confident that these measures will help to restore fiscal discipline and debt sustainability, and bring down inflation as well as help stabilise the currency.
The global economic outlook remains uncertain owing to broad-based and elevated inflation, policy tightening, worsening financing conditions, and lingering spillover effects from geopolitical tensions. These headwinds are likely to persist through the first half of 2023, driving down confidence and weakening real household disposable incomes in advanced and emerging market economies.
For emerging and developing economies, growth momentum is projected to remain firm; supported by the relaxation of lockdown restrictions in China and still-high commodity prices. Though showing signs of cooling, inflation levels remain elevated; and central banks, especially in advanced economies, have signalled the need to maintain a tight monetary policy stance to contain inflationary pressures… albeit at a measured pace.
Implications of latest hike
The 28 percent increase is expected to further drive up the average cost of borrowing, which reached 35.58 percent at the end of 2022.
The banking sector and business community will be wary of the latest hike, as it is likely to increase the cost of borrowing and dampen business confidence – which has already deteriorated from 98.4 points at the end of 2021 to 75.7 points at the close of 2022; lower than consumer confidence.
Already, businesses that have been struggling to cope with economic challenges of the past year are expected to be hit hard by the increase in borrowing cost.
This, analysts fear, could in turn lead to job losses, reduced investment and a slowdown in the overall economy.
Reason for rise of inflation
Inflation remained elevated in 2022, driven by both demand pressures and supply shocks. The two price readings since the last MPC meeting showed a significant jump in headline inflation – to 54.1 percent in December 2022 from 50.3 percent in November, and 40.4 percent in October 2022.
The acceleration in inflation was driven mainly by lagged effects of the sharp currency depreciation recorded in October. Food and non-food inflation went up significantly. Food inflation surged to 59.7 percent in December from 55.3 percent in November 2022, while non-food inflation rose to 49.9 percent from 46.5 percent over the same comparative period.
Underlying inflationary pressures similarly remained elevated. The Bank’s core inflation measure, which excludes energy and utility, accelerated to 53.2 percent in December 2022 from 49.7 percent in November.
However, the Bank’s surveys on consumers, businesses and the financial sector showed that inflation expectations eased in December 2022. This indicates agents’ expectations of a moderation in inflationary pressures on the horizon.