With IMF funding deal sealed, economists split on Ghana’s rates call
Economists are divided on whether Ghana will raise interest rates for a sixth time in a row after the International Monetary Fund listed continued monetary tightening among conditions for a $3 billion bailout program sealed last week.
Of 11 economists surveyed by Bloomberg, seven forecast the monetary policy committee will hold the key interest rate and the rest expect an increase.
Those predicting a hike, expect the MPC to do so after the IMF’s Managing Director Kristalina Georgieva said in a statement on the $3 billion deal that “monetary and exchange rate policies under the program will focus on reining in inflation and rebuilding foreign reserve buffers.”
She also said, “the Bank of Ghana will continue tightening monetary policy until inflation is on a firmly declining path and will eliminate monetary financing of the budget.”
While the annual inflation rate ebbed for a fourth straight month in April, at 41.2% it is still high, compared with the central bank’s 6% to 10% target range, said Priscilla Twumasi Baffour, an economist and senior lecturer at the University of Ghana.
“At this rate of inflation it will be very difficult for any central bank to try to target a positive net return on financial instruments, so I think that the target is to contract the environment such that inflation will be forced down faster,” she said.
Risks to the inflation outlook from new tax measures and an increase in utility prices may also persuade the MPC to lift rates, said Courage Boti, an economist at Accra-based GCB Capital Ltd. There’s also lots of liquidity in the system and banks’ credit stance hasn’t changed, and “if the central bank is minded to sustain the disinflation process then there is every justification for raising the rates but at a more marginal pace than before,” he said.
The MPC has increased the key interest rate by 16 percentage points since November 2021 to 29.5% to tame inflation and steady the currency’s 43% decline against the dollar that was stoked by the nation’s worsening financial conditions and ballooning debt.
The country suspended payments on most of its external debt in December. The government plans to sign a memorandum of understanding on restructuring its loans with official creditors by June or July, the Finance Ministry said last month.
Those predicting a hold, such as Absa Group Ltd.’s Ridle Markus and Mpho Molopyane, expect the MPC will take into consideration the weak economy. The IMF projects economic growth will slow to 1.5% this year from 3.1% in 2022.
The unchanged camp also anticipates rate setters will factor in an improving inflation outlook because of a reduction in transport fares in May and a rally in the cedi that’s been driven by the IMF deal.
Some economists like Bojosi Morule and Andrew Matheny at Goldman Sachs Group Inc. see room for the MPC to cut rates later this year.
“We expect the largest reduction in inflation to occur in late-2023 due to the base effects from last year’s FX shocks,” the economists said in a research note. “As a result, we expect the headline figure to dip below 25% year-on-year in the third quarter, paving the way for rate cuts to begin in quarter four, barring further shocks.”
