Fitch revise downwards by 200bps BoG interest rate forecast for end-2023
Fitch Solutions has revised downwards its end-2023 interest rate projection for Ghana by 200 basis points settling at 28% instead of the previously forecasted 30%. The revision comes as a response to the Bank of Ghana’s monetary policy committee (MPC) meeting on July 24, 2023, which saw a less substantial interest rate increase than anticipated.
Contrary to Bloomberg’s consensus expectations of the Bank of Ghana maintaining the interest rate at 29.50%, the MPC opted to raise the rate by a modest 50 basis points (bps), bringing it to 30%. Fitch Solutions had initially foreseen a more robust 250bps hike.
Bank of Ghana’s Governor, Ernest Addison, defended the decision, stressing that heightened business expectations of inflation warranted additional monetary tightening to safeguard against inflationary pressures taking root and derailing the disinflation process.
According to Fitch Solutions, the current 30% rate is viewed as the terminal rate, as they foresee inflation trending downward in the latter half of 2023. In line with this outlook, Fitch predicts that the Bank of Ghana will initiate a monetary easing cycle in the final quarter of the year, gradually reducing the benchmark policy rate by 200bps to 28% by the year-end.
Looking ahead to the next MPC meeting scheduled for September 2023, Fitch Solutions anticipates that the Bank of Ghana will maintain the policy rate unchanged. The expected disinflation process to resume in Q3 2023 should provide support for this stance, with recent inflationary pressures largely attributed to a weakened exchange rate compared to the previous year.
Fitch Solutions is confident that the impact of imported inflation on headline figures should begin to wane, supported by improved exchange rate stability driven by IMF funding and a more positive investor sentiment.
Taking a longer-term view into 2024, Fitch Solutions envisions the Bank of Ghana persisting with its monetary easing trajectory, foreseeing the benchmark interest rate being trimmed by 600bps to 22% by the end of the year.
This expectation is underpinned by the anticipation of inflation continuing on a downtrend, averaging at 17.1% in 2024. The decline in inflation is expected to be bolstered by high base effects, particularly in the first half of 2024, alongside exchange rate stability.
Fitch Solutions posits that Ghana’s potential debt deal with external creditors in the second half of 2024 will further strengthen the exchange rate and alleviate imported price pressures. Coupled with subpar real GDP growth attributed to fiscal consolidation efforts under the IMF program, the central bank is likely to wield lower interest rates as a stimulatory measure to galvanize economic activity.
