BoG hikes policy rate to 27%, projects 2023 inflation at 25%

The Bank of Ghana (BoG) has projected Ghana’s inflation to “peak in the first quarter of 2023 and settle at around 25 % by the end of 2023.”

Current inflation stands at 40.4% (October 2022).

Governor of the BoG and Chairman of the Monetary Policy Committee (MPC), Dr Ernest Addison who announced a 250 basis points hike in the benchmark interest rate to 27% told journalists in Accra that the inflation forecast is conditioned on the continued maintenance of tight monetary policy stance and the deployment of tools to contain excess liquidity in the economy.

The BoG admitted however that there are some risks to the forecast that will have to be monitored, including additional pressures from the proposed 2.5% increase in Value Added Tax (VAT) and exchange rate pressures.

“Continued vigilance of the evolution of these potential price pressures in the outlook will be key,” Dr Addison said.

Touting the efficacy of its monetary tightening measures the Governor noted the view of the Committee to the effect that there was evidence that the policy rate increases in the past few months had helped dampen the pace of monthly price increases.

“Between May and August 2022, the monthly inflation number eased from a peak of 5.1% to 1.9%.

“However, this was reversed in September and October on account of additional shocks from upward adjustment in ex-pump petroleum prices, utility tariff adjustments, and transportation fare increases.

“In the event, inflation jumped in October 2022 to 40.4% and has dragged along with it, core inflation, which is almost at par with headline inflation and indicating significant underlying inflation pressures and upside risks to the inflation outlook,” Dr Addison.

It will be recalled that the International Monetary Fund (IMF) advised the BoG and Central Banks across the world not to ease monetary policy tightening, in spite of its   turbulent impact on businesses and on economies.

The Fund in its latest World Economic Outlook report maintained that “monetary policy should stay the course to restore price stability, and fiscal policy should aim to alleviate the cost-of-living pressures while maintaining a sufficiently tight stance aligned with monetary policy.”

The Bretton Woods lender of last resort argued that “without price stability, any gains from future growth are at risk of being eaten up by a renewed cost-of-living squeeze.”

It noted that “Central banks need to act resolutely while communicating clearly the objectives and the steps to achieve them.”

The Fund however admitted that taming inflation will come at a cost, noting that “unemployment will rise and wages will decline as monetary policy tightens.”

The BoG last month raised its benchmark interest rate to the highest level in more than five years to arrest inflation that continues to drown the efforts of economic managers.

Dr Ernest Addison, the Governor of the Bank said two years since the Covid-19 pandemic and a war in-between, the global economy continued to face severe headwinds coupled with heightened uncertainties.
He said the global growth had slowed, with recession concerns dominating markets in the near term with global inflation remaining high, driven largely by food and energy prices.

He said the Central Banks’ resolve to dampen the persistent and broad-based inflation pressure globally had led to aggressive policy tightening in advanced economies.

The Governor said the risks to the global outlook were firmly on the downside reflecting possibility of policy mistakes amid deteriorating growth and elevated inflation, tighter financing conditions, and stronger US dollar.

“These external shocks have had severe consequences on the Ghanaian economy, reflected in high and rising inflation from exchange rate pass-through effects, and complicated the policy environment,” he added.

He said the foreign exchange market witnessed increased volatility, with intense pressure on the local currency, especially in September and October.

Factors such as tightening global financing conditions, the sovereign downgrades, the de- facto closure to the international capital market, portfolio reversals, and increased demand for foreign exchange amid supply constraints, contributed to the significant weakening of the Ghana cedi.

Dr Addison said recently, the sharp depreciation episode was driven by speculation of a possible debt restructuring which led to portfolio rebalancing in favour of foreign currency holdings as against Ghana cedi denominated assets.

“Looking ahead, the next few readings of inflation will shed light on the extent of pass-through of the accelerated depreciation of the Ghana cedi in October on inflation dynamics,” he added.

He said notwithstanding the significant improvement in the trade surplus, largely driven by higher export receipts from increased gold production and higher crude oil prices, relative to imports, the current account deficit widened, reflecting increased cost of imported petroleum products arising from higher crude oil prices.

This he said underscores the fact that, on average, higher crude oil prices have relatively modest gains on the trade account.

He said the implementation of the 2022 Budget had come under severe stress and revenue shortfalls, expenditure rigidities, lack of access to the international capital market to fund the budget, uncovered auctions and non-resident portfolio reversals have all acted to create a huge financing gap.

“With access to the external capital market closed and the domestic market under performing, there has been severe pressure on the Bank of Ghana’s overdraft facility available to the Government for short term cash flow management, without which the Government would have had difficulty in meeting its obligations,” he said.

The Governor said the 2023 Budget Statement had committed to reset fiscal policy and firmly place it on the course of fiscal consolidation with the announcement of the new revenue measures and expenditure rationalization measures.

He said to guarantee debt sustainability over the medium term, a debt exchange operation is proposed to be undertaken to support the consolidation agenda.

Dr Addison said the broad expectation was for steadfast implementation of these measures to foster confidence, improve the debt-metrics and complement the current monetary policy stance at tackling current inflationary pressures.