Fitch Forecasts 2% Cut In BoG’s Policy Rate In November
Fitch Solutions in its recent report on Ghana has stated that it expects the Bank of Ghana (BoG) to cut its benchmark policy rate by 200 basis points (bps) to 27% in November when the Central Bank holds its last Monetary Policy Committee (MPC) press briefing for the year.
At the most recent monetary policy committee (MPC) meeting on July 26, the central bank policymakers decided to keep the key rate on hold at 29%, citing ‘uncertainty regarding the inflation path’ caused by recent exchange rate weakness and rising fuel and utility prices.
According to Fitch Solutions, although the Central Bank’s decision aligned with its expectations, the significant depreciation of the cedi and the BoG’s hawkish tone has prompted it to revise the end-2024 forecast upward from the previous 25% forecast.
“We expect that the Bank of Ghana (BoG) will cut its benchmark policy rate by 200 basis points (bps) to 27% by end-2024. We think that the BoG will implement a 200bps-cut at the last MPC meeting of the year in November, bringing the key rate to 27%. Although inflationary pressures remain more persistent than the central bank would like, we believe it will remain on a downward trend, falling below 20% by September.
“In addition, we expect that the cedi will start paring back some of the losses it incurred so far in 2024, which will limit upside inflationary risks. Indeed, Ghana started the restructuring of its eurobonds in June and will likely conclude the process in September. Post-restructuring, we anticipate investor sentiment towards Ghana to improve, leading to stronger demand for the cedi. These factors will provide the BoG with the necessary conditions to implement a rate cut in November,” remarked Fitch Solutions.
In the upcoming MPC press briefing by BoG scheduled for September, the research agency notes that it expects the Central Bank to leave the policy rate unchanged mainly due to persistent underlying price pressures and robust economic activity reducing the need to adopt a more accommodative monetary policy stance.
“We anticipate that the BoG will leave the policy rate unchanged at the upcoming MPC meeting in September for two key reasons.
“First, while inflation will come down in the coming months, underlying price pressures will persist. We project that consumer price growth will moderate to 20.7% y-o-y in August—the last inflation print before the September MPC meeting— down from 22.8% in June. However, inflation readings will remain higher than what central bank policymakers are comfortable with, driven by the ongoing effects of exchange rate weakness and rising food prices. Indeed, month-on-month inflation remained high at 2.9% in June, indicating that Ghana’s disinflation trend is primarily driven by favorable statistical base effects, rather than improving supply and demand dynamics. This is likely to discourage the BoG from implementing a rate cut in September.
“Second, economic activity will remain robust, reducing the need to adopt a more accommodative monetary policy stance. Real GDP growth accelerated sharply to 4.7% y-o-y in Q1 2024—from 3.8% in Q4 2023—marking the fastest economic expansion in over two years. We anticipate that Q2 economic growth, which will be released prior to the September MPC meeting, will also surpass the Bank of Ghana’s full-year forecast of 3.7%, driven by strong domestic demand. Indeed, we expect solid growth in private consumption in Q2 as household purchasing power gradually improved. Additionally, we believe that fixed investment growth remained robust due to recovering business sentiment. Given that domestic demand is likely to have exceeded central bank expectations, the pressure to implement a rate cut will be limited,” said Fitch Solutions.
