Fitch Solutions is predicting that Bank of Ghana (BoG) will commence a monetary easing cycle in the 4th quarter of 2023, cutting the policy rate by 200 basis points (bps) to 27.50% by end-2023.
According to the financial and credit rating agency, this will be influenced by inflation which will continue to moderate over the coming months.
“We expect that the BoG will commence a monetary easing cycle in Q423, cutting the policy rate by 200bps to 27.50% by end-2023. Consumer price growth will continue to moderate through H223 [2nd half of 2023] due to a stable exchange rate and high base effects, likely falling below the central bank’s end-2023 inflation target of 29.0% around September-October [2023].
“Indeed, we forecast that inflation will fall to 20.2% by end-2023. This will see real interest rates return to positive territory in Q423, allowing policymakers to adopt a more dovish stance”, it added in its latest article on Ghana.
It noted that a further fall in the policy rate will push lending rates down.
Despite the International Monetary Fund (IMF) having stated that the Bank of Ghana (BoG) would “continue tightening monetary policy” under the Extended Credit Facility, central bank policymakers kept the benchmark interest rate on hold at 29.50% at the May [2023] monetary policy committee (MPC) meeting.
This, Fitch Solutions, said suggests that the BoG’s tightening cycle – it has raised the policy rate by 1,500 basis points (bps) since late 2021 – has come to an end.
BoG to keep policy
It further stated that the BoG will keep the policy rate on hold at its next Monetary Policy Committee meeting in July.
It explained that consumer price growth, which has been on a disinflation path since January [2023], will continue to moderate over the coming months, allowing policymakers to refrain from hiking.
“Transport and utility inflation will decelerate thanks to easing global energy prices, while a stronger exchange rate following IMF executive board approval of Ghana’s Extended Credit Facility in May will lower short-term import costs. Furthermore, high base effects from sharp price increases in 2022 will keep headline inflation on a downward trajectory in the coming months”.
Additionally, Fitch Solutions, said a pause in monetary financing of the fiscal deficit will lower price pressures in the months ahead.
It pointed out that the BoG has helped plug the wide budget shortfall as the government faced limited financing options after losing access to international capital markets in late 2021.
This has led to a sharp increase in liquidity, with broad money supply having risen to 161.9bn ($13.8bn) in April [2023], a 53.9% increase compared to a year earlier.
However, the government and BoG signed a memorandum of understanding in early May [2023] to cease central bank lending to the government, which will lead to reduction in liquid assets and help lower inflationary pressures in the coming months.
