BoG to hike policy rate by 300bps as a condition to IMF deal – Fitch Solutions
Research firm, Fitch Solutions, says it expects the Bank of Ghana to hike the monetary policy rate by 300 basis points (3%) as a conditionality to an IMF deal in 2023.
The anticipated policy rate hike in 2023, Fitch Solutions asserts, will result in real interest rates returning to the positive territory in 2023 given a year-end policy rate and inflation rate of 27% and 19% respectively.
In a recent report on the Ghanaian economy, the research agency notes the positive real interest rates, as a result of the policy rate hike will stimulate capital inflows and provide support to the local currency (cedi).
“We expect that the BoG would have to tighten monetary policy further in 2023, as a condition of an expected IMF deal. Indeed, Ghana started negotiations with the IMF in July, and we expect a deal to be reached at the end of 2022. We forecast the BoG to increase the benchmark interest rate by an additional 300bps to 27.00% by end-2023, resulting in real interest rates returning to positive territory in 2023, after having been negative since March 2022.
“This will stimulate capital inflows and provide support to the exchange rate, which will contribute to the cedi returning to a more conventional depreciatory trajectory in 2023. Together with easing global commodity prices, we believe that this will allow inflation to gradually come down, averaging 19.0% over the year,” it stated.
In the meantime, Fitch Solutions, says the BoG is unlikely to further increase the policy rate beyond the projected 24% for this year (2022).
According to Fitch Solutions, the BoG’s appetite to tighten monetary policy beyond the projected 24% will reduce, given the country’s precarious fiscal position and weak economic conditions.
“Capital flight will incentivise the BoG to maintain a hawkish bias in the upcoming MPC meetings. Ghana’s capital and financial account recorded USD1.3bn in net outflows in H122, compared with net inflows of USD3.0bn over the same period in 2021, primarily driven by portfolio reversals. While we believe this is in part caused by weak investor sentiment, the combination of a stronger dollar and higher interest rates in developed markets are also key factors, weighing on the attractiveness of emerging market assets. In an attempt to limit further capital flight and ease pressure on the cedi, we believe that the BoG will continue raising the benchmark interest rate through year-end.
“That said, we believe the BoG is unlikely to increase the policy rate beyond 24.00% in 2022, given the country’s precarious fiscal position. As Ghana will have to rely on domestic debt issuance over the near term – due to its inability to access international bond markets – further monetary tightening will increase borrowing costs. Combined with weak economic conditions, we expect this will reduce the BoG’s appetite to tighten monetary policy beyond our current interest rate forecast,” it added.
Meanwhile, Ghana’s inflation is expected to remain elevated – driven mainly by rapid depreciation of the cedi – and will only peak in the last quarter of the year – Q4 2022.
The elevated trajectory of the country’s inflation rate, will incentivise the Central Bank to remain hawkish over the coming months.
Fitch Solutions notes that it expects the BoG to continue hiking its policy rate to 24% by the end of the year.
The 24% end-year policy rate indicate a further 200 basis points increment in the monetary policy tool.
The monetary policy committee (MPC) increased the benchmark interest rate by 300 basis points (bps) to 22.00% at its emergency meeting on August 17, citing the need to address “risks to the inflation outlook”.
The BoG had announced the emergency meeting to review “recent developments in the economy”, following a rapid rise in consumer price growth – which reached 31.7% y-o-y in July – and the sharp depreciation of the cedi, which has lost roughly 35.0% of its value against the US dollar year-to-date.
