Bank of Ghana to Tighten Monetary Policy as Growth Pressures Ease

The Central Bank of Ghana is expected to shift to moderate policy tightening in 2022, and hike the monetary policy rate (MPR) by 100 basis points to 14.50% by the end of the year 2022, Fitch Solutions said in its West African Monitor report.

The firm expressed the view that a sufficient proportion of vulnerable groups in Ghana is likely to be vaccinated next year to prompt the government to relax most Covid-related restrictions, thus, sustaining the economic recovery.

In the report, Fitch Solutions forecast real gross domestic product (GDP) growth slowing slightly to a still-healthy 4.5% in 2022, as base effects coming off of the 2020 slowdown fade.

“We think that, with risks to growth reducing, the Bank of Ghana will shift to a focus on targeting inflation and supporting the cedi”, the report added.

Meanwhile, the report added that risks to the outlook are tilted towards the Bank of Ghana holding for longer.

“If the inoculation programme fails to gain momentum in the second half of 2021 and 2022, the government would retain social distancing rules well into 2022, posing significant headwinds to growth. Consequently, we think the central bank would seek to cushion the impact on households and business by refraining from hiking interest rates”, it added.

However, Fitch Solutions expects that the Bank of Ghana to hold a benchmark interest rate at 13.50% through to the end of the year 2021, after cutting it by 100 basis points (bps) at its May 2021 meeting. The cut, to a 10-year low, was against expectations and followed six consecutive holds.

Recall, the Bank of Ghana last cut the MPR in March 2020, by 150 basis points to 14.50%, to support the economy amid the first wave of the Covid-19 pandemic.

In its statement following the May 2021 monetary policy committee meeting, the monetary policy authority noted the need to support the economy amid a ‘lack of certainty about further waves of the pandemic with new variants and vaccination challenges’, and emphasised that although ‘risks to the inflation outlook remain muted in the near term’, pressures from ‘rents and transport fares would require some monitoring to anchor inflation expectations.

Amid rising demand-side pressures, higher fuel prices and elevated levels of government spending annual inflation will average 9.3% in 2021, which is towards the upper end of the Bank of Ghana’s 6.0-10.0% target range.

Price growth slowed to 8.5% in April 2021 largely as a result of a sharp fall in food inflation, which slowed from an average of 12.0% in Q1-2021 to 6.5% in April, reflecting increased food supplies following a strong food crop harvest in the period.

Economic data shows that Ghana recorded average price growth of 10.2% in Q1-2021 and 9.9% over 2020.

However, analysts are predicting that inflation is likely to tick up in the second half of 2021 as the economic recovery gathers momentum, resulting in greater demand-side inflationary pressures; transport prices will likely accelerate on the back of higher oil prices.

Fitch Solutions expects the average price of Brent crude to rise to US$66.0 per barrel (/bbl) in 2021 from USD43.2/bbl in 2020.

It said rising international oil prices have already seen the domestic retail price of gasoline increase by 16.9% to US$1.05 per litre between January and May.

While the relatively stable cedi exchange rate should mitigate imported inflation, the government’s expansionary fiscal policy will keep inflation relatively elevated, limiting room for the Central Bank to cut further in the coming months.

“We expect growth to accelerate in the coming months as the government further relaxes social distancing rules”, Fitch Solutions said in the Africa monitor report.

In Ghana, restrictions were tightened in the first quarter of 2021 in response to the second wave of infections, and have remained fairly stringent since then – despite the launch of the government’s vaccination drive on March 1.

Although the pace of vaccinations slowed in the late second quarter of the year as a result of supply and distribution challenges, analysts are expecting the programme to gain momentum in the second half, thus facilitating greater reopening and a rise in consumer and business confidence.

Analysts believe a rise in consumers and business confidence will disincentivise Ghana’s monetary policy authority from further rate cuts.

“We expect that the rise in private consumption and business investment in the coming months will result in robust real GDP growth of 4.8% in 2021, as against 0.4% in 2020”, Fitch Solutions projected in the Africa monitor report.