Market anticipates MPC to hold policy rate at 29.5%


As inflation continues to trend downward, the market anticipates the Bank of Ghana’s Monetary Policy Committee (MPC) to adopt a policy-hold strategy at its 112th meeting this week by retaining the rate at 29.5 percent.

Consumer prices slowed for the fourth month running in April 2023 to 41.2 percent year-on-year, -3.8 percent from March 2023 – thus 12.9 percent since start of the year; sustaining the disinflationary run that commenced in January 2023 following a peak of 54.1 percent in December 2022.

To reinforce the pace of disinflation and re-anchor inflation expectations, the central bank’s MPC tightened financing conditions further – hiking the policy rate by a cumulative 250 basis points (bps) to a record high of 29.5 percent in Q1-2023 while increasing the cash reserve ratio (CRR) by 200bps to 14 percent.

Apakan Securities, in its review of the April 2023 inflation data and outlook, said: “We perceive a hold-to-cut policy rate scenario by the Bank of Ghana MPC on the horizon. As inflation continues to trend downward, we expect the MPC of the Bank of Ghana to adopt a policy-hold strategy at its next meeting in May-2023”.

Moderating price pressures from volatile inflation triggers – the instability of local currency, continuous decline of petroleum prices at the pumps – and the favourable base effects underpin the easing inflation expectations despite renewed upside risks from increased GH¢ liquidity and new revenue interventions.

The cedi has been relatively more resilient against its major trading currencies thus far in 2023, limiting indirect pressure from the pass-through effects of depreciation to general prices. Additionally, petroleum prices continue to decline at the pumps, which underpins deflation from the transport division for the second consecutive month.

Apakan Securities further projects a policy rate cut in the range of 100 to 200 basis points (bps) in subsequent meetings of the MPC if inflation declines much quicker.

“We expect the favourable base effect to impact positively on headline inflation in Q2-2023, driving our disinflationary view in Q2-2023. We also expect the full impact of higher-base effects to reinforce a further decline in headline inflation for Q2-2023. The scenario of a stable local currency performance and stable prices for petroleum products at the pumps support the view of declining inflation in Q2-2023.

“Additionally, the central bank’s adherence to zero financing of government’s budget could also support monetary policy effectiveness to help tame and re-anchor inflation expectations,” the market observer noted.

Barring any shocks, the market expects a further decline of headline inflation in May-2023.

GCB Capital, in its analysis of inflation and implications for interest rates and monetary policy, maintained hope for continuous disinflation through 2023; supported by favourable base drift and easing price pressures from the primary drivers of inflation.

Nonetheless, it expects the price effects of new and revised taxes, particularly the Excise Tax Amendment Act, to trigger the re-pricing of goods from the May 2023 inflation data window. Thus, the anticipated price effect of these tax measures – the lagged impact of the utility tariff adjustments and the simmering food price pressures – represent upside risks to inflation in the near-term, potentially moderating the pace of disinflation through Q2 2023.

In view of this, the market observer said: “We expect the central bank to maintain a cautious policy stance to anchor the disinflation process”.

“The interbank market is still awash with liquidity despite the hike in policy rate and the cash reserve ratio in March-2023. While the Bank of Ghana is regularly mopping up GH¢ liquidity through the weekly 56-day OMO bill, the pent-up liquidity on the interbank market remains an upside risk to inflation; and we expect the Monetary Policy Committee to maintain the tight policy stance to anchor the disinflation process in the immediate term, albeit at a slower pace,” GCB Capital said.

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