The Monetary Policy Committee (MPC) of the Bank of Ghana (BoG) has opted to keep the key monetary policy rate unchanged at 29.5 percent, citing rapid easing of underlying inflationary pressures and decreasing inflation expectations.
This decision comes amid calls from the International Monetary Fund (IMF) for the central bank to maintain a tight monetary policy until inflation is firmly on a declining trajectory and to eliminate monetary financing of the fiscal budget.
Earlier to this policy action, the MPC in order to reinforce the pace of disinflation and re-anchor inflation expectations tightened financing conditions further in its 111th meeting of March 2023. The policy rate was raised by a cumulative 250 basis points (bps) to a record high of 29.5 percent in Q1-2023, while the cash reserve ratio (CRR) was increased by 200 bps to 14 percent.
The Bank of Ghana Governor, Dr. Ernest Addison, speaking at a press briefing following the 112th meeting of the MPC highlighted the positive developments in inflation and the economy.
He stated: “The committee noted a significant decline in headline inflation, with a decrease of more than 12.0 percent since beginning of the year. The percentage of items in the CPI basket experiencing inflation above 50 percent is also decreasing, indicating a return to disinflation”.
The decline in inflation can be attributed to various factors: including tight monetary policy, stable local currency, lower ex-pump petroleum prices and the recent memorandum of understanding signed by the Bank of Ghana on zero financing to the budget, which will contribute to achieving the inflation target.
Furthermore, recent approval of the US$30billion Extended Credit Facility (ECF) arrangement with the IMF has strengthened recovery efforts and restored macroeconomic stability and debt sustainability. However, the approval is conditional on implementing fiscal and structural policies such as tax reforms, revenue administration improvements, and sustainable fiscal policy implementation.
Domestic price developments also indicate a continuous easing of inflationary pressures. Headline inflation declined to 41.2 percent in April 2023, supported by monetary policy tightening, exchange rate stability and lower international crude oil prices. From beginning of the year to April 2023, headline inflation has decreased by 12.9 percent, non-food inflation by 14.5 percent and food inflation by 11.1 percent.
In addition, underlying inflationary pressures are decreasing, as the central bank’s core measure of inflation has declined for the fourth consecutive month. Core inflation, excluding energy and utility prices, fell to 41.7 percent in April 2023. Consumer and business inflation expectations also declined in April 2023 – except for the banking sector, which remained unchanged.
The economy experienced a moderation in real gross domestic product growth, with a rate of 3.1 percent in 2022 compared to 5.1 percent in 2021. The slowdown was mainly driven by the agriculture and services sectors, while the industry sector showed signs of recovery due to increased gold production.
Despite these positive developments, the updated real Composite Index of Economic Activity (CIEA) contracted by 6.4 percent in March 2023, even though it improved compared to the previous month. Imports, cement sales, credit to the private sector and port activity were the main contributors to contraction.
Nonetheless, domestic VAT collections, industrial electricity consumption and tourist arrivals showed improvement during the review period.
The BoG’s confidence surveys conducted in April 2023 revealed improved sentiments. Consumer confidence increased due to easing inflation, leading to optimistic expectations for future economic conditions. Businesses achieved short-term targets and expressed positive sentiments about company and industry prospects, driven by improving consumer demand and a stable local currency.
Ghana’s Purchasing Managers’ Index (PMI) for April 2023 also indicated improvements in business conditions for the third consecutive month.
Looking ahead, barring any shocks, the market expects a further decline in headline inflation for May 2023. However, inflation has risen sharply in recent months due to global inflation, adjustments in petroleum prices and utility tariffs, global food price increases, monetisation of the fiscal deficit, and a large pass-through of exchange rate depreciation. The Monetary Policy Committee’s decision to raise the Monetary Policy Rate aims to anchor inflation expectations toward the medium-term target of 8±2 percent.
