By Joshua Worlasi AMLANU ([email protected] )
Amid the inflationary pressures in 2024, the Bank of Ghana (BoG) Monetary Policy Committee (MPC) implemented a series of measures aimed at reining-in inflation, stabilising the economy and achieving sustainable disinflation.
However, recent consumer inflation data highlight a persistent challenge, raising the likelihood of further policy rate hikes in 2025 to maintain restrictive monetary conditions and anchor inflation expectations.
Monetary Policy Committee actions
The MPC’s decisions throughout 2024 reflected a cautiously tight stance, given that the policy rate was reduced by 300 basis points. After ending 2023 at 23.2 percent, inflation rose to 25.8 percent by March 2024 before easing to 20.4 percent in August.
The slowdown in disinflation was attributed to seasonal food price increases, rising utility costs and the effects of currency depreciation. Notably, food inflation, which had been a major driver of price increases, moderated from 29.6 percent in March to 19.1 percent in August.
The BoG’s main inflation measure, which excludes energy and utility prices, also reflected this easing trend by declining to 19.4 percent in August from 26.3 percent in March. However, the MPC noted renewed upward pressure on inflation toward the end of 2024, driven primarily by food prices and exchange rate pass-through effects.
In January 2024, the Committee acknowledged an emerging recovery in economic activity but emphasised the need for a strong monetary policy stance to consolidate gains in disinflation. This led to a 100-basis-point reduction in the Monetary Policy Rate (MPR) to 29 percent. Headline inflation had declined by over 30 percentage points in 2023, driven by tighter monetary policy, stable crude oil prices and relative exchange rate stability.
However, the optimism was short-lived. By March 2024, inflationary risks began to tilt upward due to potential increases in transport fares, utility tariffs and the pass-through effects of currency depreciation. Consequently, the MPC decided to maintain the MPR at 29 percent, signalling caution amid the emerging headwinds.
In April 2024, the Committee introduced adjustments to the Cash Reserve Ratio (CRR) for banks. Depending on their loan-to-deposit ratios, banks were required to hold CRRs of 15 percent, 20 percent or 25 percent. These measures aimed to manage liquidity and align monetary policy with inflation control objectives. The MPC declared these adjustments effective from April 2024.
In its assessment during the September 2024 meetings, the Committee noted that preliminary data pointed to improved macroeconomic conditions. At the time, headline inflation had eased and growth had picked up. Headline inflation, since the first quarter, had declined for five consecutive months by 5.4 percentage points. Core inflation had also declined sharply over the same comparative period, by 6.9 percentage points. These trends suggested that the disinflation process was on course.
For this reason, the Committee decided to lower the Monetary Policy Rate by 200 basis points to 27.0 percent; judging that the risks to the inflation outlook were fairly balanced.
However, since this policy rate cut consumer inflation has been on the rise – from 21.5 percent in September 2024 to 23.8 percent in December 2024, marginally higher than the same period of 2023.
Liquidity Management and Money Supply
The central bank’s efforts to manage liquidity played a pivotal role in moderating money supply growth. Broad money supply (M2+) grew by 25.5 percent in February 2024 compared to 44.9 percent a year earlier. This deceleration was consistent across currency outside banks, savings, time deposits and foreign currency deposits. Reserve money growth also slowed significantly, falling to 25.3 percent in February 2024 from 54.3 percent for the corresponding period of 2023.
By June 2024, annual growth in M2+ further moderated to 34.2 percent; down from 44.4 percent in June 2023. The BoG attributed this slowdown to tighter liquidity management and adjustments in reserve requirements for banks. In its September 2024 MPC announcement, the BoG noted that annual growth in M2+ had declined to 37.1 percent for August 2024, reflecting a reduced pace of growth in demand deposits, savings, and time deposits.
Despite these efforts, total liquidity surged by 43.8 percent by October 2024, indicating the continued influence of fiscal pressures and external economic factors.
IC Securities, in its analysis of the December 2024 inflation print, expressed concerns about Ghana’s monetary policy trajectory. Inflation figures exceeded the authorities’ upper target band of 22 percent, raising the prospect of triggering the IMF’s Monetary Policy Consultation Clause (MPCC).
This clause mandates remedial measures to restore inflation to the target band, potentially including further monetary tightening.
“Ghana’s real policy rate has softened to 3.2 percent, which may necessitate further hikes in the nominal policy rate to restore a sufficiently restrictive monetary stance. A real policy rate of 5 percent to 7 percent is likely required to tighten monetary conditions and reinforce disinflation efforts,” IC Securities said in a note to investors.
The BoG’s recent FX interventions have mitigated some inflationary pressures, but structural issues remain. IC Securities forecasts up to a 200 basis-point rate hike at the MPC’s January 2025 meeting, a move aimed at addressing demand-side pressures and restoring macroeconomic stability.
The implications of these monetary policy decisions extend beyond inflation control. Tight liquidity and elevated reserve requirements for banks have constrained private sector credit growth. Nominal private sector credit (PSC) grew by 10.5 percent in September 2024, a modest improvement from the 7.9 percent growth recorded in September 2023. However, real PSC – adjusted for inflation – declined over the same period, reflecting the challenges businesses face in accessing affordable credit.
The BoG’s liquidity mop-up operations, which amounted to GH¢15.5billion in December 2024, brought the total for the year to GH¢149.5billion. These operations underscore the central bank’s commitment to maintaining macroeconomic stability, albeit at the cost of limiting credit availability.
IC Securities emphasised the need for coordinated policy action, stating: “The recent inflation pressures appear structural and require complementary fiscal policies. A softening of the tax burden in 2025 could help ease price pressures and support the BoG’s disinflation efforts”.
The BoG’s latest inflation forecast suggests that headline inflation could return to the medium-term target range of 6 percent to 10 percent by end of 2025. However, this projection depends on the effectiveness of monetary policy measures and implementation of supportive fiscal policies.
The January 2025 MPC meeting will be closely watched for its potential rate hike decision, which could set the tone for the year. Achieving a sufficiently restrictive monetary position will be critical to restoring macroeconomic stability and fostering sustainable economic growth.
