BoG set to initiate monetary easing cycle in Q4 2023 amidst inflation moderation
The Bank of Ghana (BoG) is poised to embark on a monetary easing cycle in the fourth quarter of 2023, with plans to cut the policy rate by 200 basis points (bps) to 27.50% by the end of the year, according to Fitch Solutions. This decision is largely influenced by the expected moderation of inflation over the coming months, signaling a positive outlook for Ghana’s economic landscape.
Fitch Solutions states, “We anticipate that the BoG will commence a monetary easing cycle in Q4 2023, reducing the policy rate by 200 bps to reach 27.50% by the close of 2023. As consumer price growth continues to moderate throughout the second half of 2023, driven by a stable exchange rate and high base effects, it is likely to fall below the central bank’s end-2023 inflation target of 29.0% around September-October 2023.”
The forecasted decline in inflation, as estimated by Fitch Solutions, is expected to reach 20.2% by the end of 2023. This anticipated drop in inflation will consequently lead to real interest rates returning to positive territory in Q4 2023, enabling policymakers to adopt a more dovish stance in their monetary policy approach.
A further reduction in the policy rate will have a cascading effect on lending rates, potentially lowering the cost of borrowing and stimulating economic growth. The move by the Bank of Ghana aims to provide a boost to the country’s economy while maintaining price stability.
Notably, despite the International Monetary Fund (IMF) previously stating that the Bank of Ghana would “continue tightening monetary policy” under the Extended Credit Facility, central bank policymakers opted to keep the benchmark interest rate unchanged at 29.50% during the May 2023 monetary policy committee (MPC) meeting. This decision suggests that the Bank of Ghana’s tightening cycle, characterized by a series of policy rate hikes amounting to 1,500 bps since late 2021, has now reached its conclusion.
Fitch Solutions anticipates that the Bank of Ghana will maintain the policy rate during its next Monetary Policy Committee meeting in July, citing the ongoing moderation of consumer price growth as a key factor influencing this decision. The easing of inflationary pressures in the months ahead, driven by factors such as decreasing transport and utility costs due to lower global energy prices and a stronger exchange rate following the approval of Ghana’s Extended Credit Facility by the IMF’s executive board, will likely support the decision to keep the policy rate steady.
Furthermore, Fitch Solutions highlights the expected reduction in price pressures resulting from a pause in monetary financing of the fiscal deficit. This shift will help alleviate inflationary pressures in the coming months. The Bank of Ghana has played a pivotal role in plugging the wide budget shortfall, providing critical financial support to the government when access to international capital markets was limited in late 2021. This liquidity injection has led to a significant increase in broad money supply, which reached 161.9 billion Ghanaian cedis ($13.8 billion) in April 2023, representing a substantial 53.9% rise compared to the previous year.
However, in a bid to curb inflationary risks, the government and the Bank of Ghana recently signed a memorandum of understanding in early May 2023 to halt central bank lending to the government. This proactive measure will gradually reduce liquid assets, helping to alleviate inflationary pressures in the coming months and foster sustainable economic growth.
As the Bank of Ghana prepares to embark on its monetary easing cycle, market participants and policymakers closely monitor the country’s inflation trajectory, striving for a delicate balance between promoting economic growth and maintaining price stability. The anticipated reduction in the policy rate will likely serve as a catalyst for increased private sector investment and pave the way for a more favorable economic environment in Ghana.
Ghana’s economic landscape appears poised for a shift as the Bank of Ghana prepares to implement a monetary easing cycle, driven by the expected moderation of inflation. With inflation forecasted to decrease and real interest rates projected to return to positive territory, policymakers aim to foster economic growth and stability. The upcoming months will prove crucial in assessing the impact of these monetary measures on Ghana’s economic trajectory and the extent to which private sector investment can be stimulated to support the country’s development goals.