Fed rate hike, higher oil prices to result in significant prime rate hike by BoG – Fitch Solutions
Research agency Fitch Solutions has asserted that it expects the Bank of Ghana (BoG) to significantly hike its policy rate this year should upside risks to the economy intensify.
In its February 2022 West Africa Monitor Report, Fitch Solutions posits that risks to the country’s economic outlook are pointed towards a larger interest rate (prime or policy rate) by the Central Bank.
Among the risks that are to cause the BoG to significantly raise its policy rate the research agency averred was the expected 25 basis points increment in the interest rate of the US Federal Reserve (Fed) and higher oil prices on the international market.
“A further factor influencing Ghanaian monetary policy in 2022 will be the US Federal Reserve (Fed). We expect the Fed to hike its funds rate target range by 25 basis points (0.25%) in response to rising inflation, which our global team expects to remain higher and stickier than previously expected.
“This will put pressure on the BoG to maintain Ghana’s interest rate differential with the US, with the view to stemming capital outflows and supporting the currency”, it stated.
“Risks to the outlook are tilted towards a larger interest rate hike by the BoG than our current forecasts indicate. Should oil prices trend higher than our Oil & Gas team’s forecasts currently indicate, transport inflation would accelerate further, pushing up headline price growth and prompting the Central Bank to implement a larger increase to its benchmark policy rate,” it added.
The Bank of Ghana kept the policy rate unchanged at 14.5% during its last meeting in January 2022.
In a statement issued by the Central Bank on Monday, January 31, 2022, following the completion of the Bank’s 104th Monetary Policy Committee (MPC) meeting, the BoG attributed the maintenance of the prime rate to mainly the 20 percent cut in government expenditure which it expects to help moderate the upside risks to the inflation outlook.
“The latest forecast shows that inflation would likely remain above target in the near-term, driven by both external and domestic factors, and only return to target in about four-quarters ahead. The key risks to the inflation outlook include: rising crude oil prices and its transmission to ex-pump petroleum prices and transportation costs, rising global inflation, food price uncertainties, and the fiscal outlook.
“The Monetary Policy Committee envisaged this scenario when it raised the policy rate in November 2021 to contain the inherent aggregate demand pressures likely to drive prices in the outlook. The Committee is of the view that the dynamics associated with the November 2021 policy rate hike are yet to be fully transmitted and expects the decisive implementation of the fiscal correction measures, especially the 20 percent cut in expenditure to help moderate the upside risks to the inflation outlook.
“The Committee will continue to monitor the impact of these policy measures and as needed call an extraordinary meeting to re-assess the inflation outlook over the forecast horizon and take the necessary policy decisions accordingly.
“Under these circumstances, the Committee has decided to keep the policy rate unchanged at 14.5 percent,” remarked Governor of the Bank of Ghana, Dr Ernest Addison.
