Policy rate hits 30% amid persisting inflationary pressures

the monetary policy rate
Dr. Ernest Addison, Governor-Bank of Ghana

The Bank of Ghana Monetary Policy Committee (MPC) has raised the monetary policy rate by 50 basis points, bringing it to a record high of 30 percent at the start of H2-2023 – an action it hopes will address underlying inflationary pressures.

This is the third time the Committee has increased the policy rate this year, with previous hikes occurring in January and March while maintaining a hold-stance in May 2023.

The decision to raise the policy rate comes as inflation has remained elevated, hovering around 42 percent throughout the second quarter of 2023. This increase in inflation is attributed to second-round effects of food prices, and various factors such as higher food prices, implementation of new tax measures and utility tariff adjustments. Despite central bank financing being eliminated in the first six months of the year, headline inflation rose from 41.2 percent in April to 42.2 percent in May – and then further to 42.5 percent in June.

Underlying measures of inflation have also seen an uptick in May 2023.

Commenting on the decision, Dr. Ernest Addison – Chairman of the Committee and Governor of the Bank of Ghana, acknowledged that core inflation has ticked up while businesses’ expectations of inflation remain at an elevated level.

He cautiously projected the outlook, stating: “Although inflation is expected to decline in the near-term, baseline forecasts show a slightly higher elevated profile in the year ahead – which if not contained could embed in underlying inflationary pressures.

“It is important that policy responds appropriately and decisively to prevent these risks from becoming embedded and consequently derailing the disinflation process,” the Governor added.

Given the country’s macroeconomic challenges, Dr. Addison emphasised the need for decisive tightening from both fiscal and monetary sides to anchor inflation expectations firmly on a declining path.

“Given these considerations and under the current circumstances, the Committee has decided to increase the monetary policy rate by 0.5 percent to 30 percent. In the coming months, the Committee will monitor closely incoming inflation data; and will respond appropriately, if needed, should inflation persist,” the Governor said.

Despite the challenges there are signs of recovery in the real sector, with higher GDP growth recorded in the first half of the year. The Real CIEA in May also showed some gradual recovery, though the Index remained in negative territory. However, real private sector credit has come under pressure due to tighter lending conditions, banks’ impaired balance sheets, elevated credit risk, and a slowdown in credit demand resulting from the lingering effects of last year’s macroeconomic downturn.

Global dynamics

On a global scale, many countries are experiencing easing headline inflation due to tighter monetary policies, lower energy and food prices, and reduced supply bottlenecks. Core inflation has been more persistent amid cost pressures and resilient labour markets. Oil prices have remained subdued despite production cuts by some OPEC+ members, reflecting uncertain global conditions. Longer-term inflation expectations in advanced economies are anchored at around 2 percent, as indicated by survey-based indicators.

Furthermore, global financing conditions remain tight in both advanced and emerging market economies, influenced by the pass-through effects of tighter monetary policy on bank funding costs and credit conditions.

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