BoG Surprises Markets with Bold Rate Cut: What’s Next for Ghana?
Bank of Ghana Cuts Policy Rate as Economic Recovery Gains Momentum
The Bank of Ghana (BoG) has taken a significant step towards monetary easing, cutting its key policy rate by 200 basis points to 27.0 percent.
This move, was announced following the 120th Monetary Policy Committee (MPC) meeting, marks a turning point in Ghana’s economic trajectory as the country continues to navigate its way out of recent financial challenges. The decision comes against a backdrop of improving macroeconomic conditions, with inflation on a downward trend and economic growth showing signs of resilience.
Dr. Ernest Addison, Governor of the Bank of Ghana, stated, “The Committee’s assessment indicates that macroeconomic conditions have generally improved since our last meeting in July. Headline inflation has eased, growth has picked up, and our external position has strengthened.”
Ghana’s economy, which faced significant headwinds in recent years due to debt distress and high inflation, appears to be on a path to recovery. The latest data from the Ghana Statistical Service shows that real GDP grew by 6.9 percent in the second quarter of 2024, surpassing expectations and marking a significant improvement from the 2.5 percent growth recorded in the same period of 2023.
Inflation, a key concern for policymakers, has been on a consistent downward trajectory. Headline inflation declined to 20.4 percent in August from 22.8 percent in June, driven mainly by easing food inflation. The Bank’s core measure of inflation, which excludes energy and utility prices, also fell to 19.4 percent in August from 22.1 percent in June.
The external sector has shown remarkable improvement, with the trade balance recording a surplus of $2.78 billion in the first eight months of 2024, significantly higher than the $1.66 billion surplus in the same period of 2023. This positive trend has been primarily driven by increased gold and crude oil exports.
Dr. Addison emphasized the role of fiscal discipline in supporting the economic recovery, noting that “Fiscal policy implementation has been robust, providing impulse that is supportive of growth, while monetary conditions have remained tight and supportive of the disinflation process.”
The decision to cut rates comes as major central banks in advanced economies have also begun easing their monetary policy stances. This global shift towards looser monetary conditions is expected to benefit emerging markets like Ghana by potentially increasing capital inflows and easing external financing conditions.
However, challenges remain. The non-performing loan (NPL) ratio in the banking sector increased to 24.3 percent in August 2024 from 20.0 percent a year earlier, highlighting ongoing credit risks. The Ghana cedi has also faced depreciation pressures, losing 24.3 percent against the US dollar year-to-date.
Analysts have generally welcomed the rate cut, viewing it as a measured response to improving economic conditions. An Economist at based in Accra, commented, “This rate cut signals confidence in the ongoing disinflation process and should help to stimulate private sector credit growth, which is crucial for sustaining the economic recovery.”
The rate cut is expected to have positive implications for businesses and consumers. Lower borrowing costs could stimulate investment and consumption, potentially accelerating economic growth in the coming quarters. However, the impact on the currency will be closely watched, given the cedi’s recent volatility.
Looking ahead, the BoG projects that inflation will continue to ease towards the target range of 13-17 percent for the year and steadily track back towards the medium-term target of 6-10 percent by the end of 2025. This outlook has given the MPC room to begin normalizing monetary policy without compromising price stability.
The decision also aligns with the government’s broader economic strategy, which aims to boost growth while maintaining fiscal discipline under the ongoing IMF-supported program.
International observers have taken note of Ghana’s progress. The IMF, in its recent review, commended the authorities for their commitment to economic reforms. The rate cut is likely to be seen as further evidence of Ghana’s improving economic management.
As Ghana continues on its path to economic recovery, all eyes will be on the next MPC meeting scheduled for November 20-22, 2024. Market participants will be keen to see if this rate cut marks the beginning of a sustained easing cycle or if the BoG will adopt a more cautious approach in the face of potential global economic uncertainties.
For now, the rate cut represents a vote of confidence in Ghana’s economic resilience and sets the stage for what could be a pivotal period in the country’s economic resurgence.
As Dr. Addison concluded, “We remain vigilant and stand ready to take necessary action to ensure that inflation continues its downward path and that our economy remains on a stable growth trajectory.”
