In a bold move, the Monetary Policy Committee (MPC) of the Bank of Ghana (BoG) has announced a reduction of the Monetary Policy Rate by 100 basis points, bringing it down to 29 percent.
This decision, revealed in a press release following the MPC meeting, reflects the central bank’s commitment to routing the economic landscape amidst global challenges. According to the BoG in summary of the assessments and key considerations that informed the Committee’s decision on the positioning of the monetary policy rate, global economic activity was mixed in 2023, improving in the first half year but moderated in the second half.
The mixed performance, on one hand reflected strong growth in the United States amid solid domestic demand and resilient labour markets despite tighter financing conditions. On the other hand, a contraction in Japan, the Euro Area, and the United Kingdom was observed. For Emerging Market and Developing Economies (EMDEs), growth was supported mainly by the rebound in China where policy support and resurgence in consumer spending offset weakness in the property sector.
The overall growth outturn for 2023 is expected to remain subdued, weighed down by the lingering weakness in the manufacturing sector alongside effects of the still tight monetary policies, and weak external demand. Given these developments, global growth is projected to end 2023 at 3.0 percent and slow marginally to 2.9 percent in 2024.
The BoG also considered global inflationary pressures in its decision-making process. Notably, inflationary pressures have eased substantially, driven by the decline in energy and food prices. Headline inflation is on a downward trajectory, although remaining above targets in many advanced economies and EMDEs due to persistence in core inflation. Longer-term inflation expectations remain anchored, reflecting the tightened policy stance of central banks and recent declines in headline inflation.
Despite a pause in policy rate hikes by central banks in Advanced Economies, the BoG acknowledges that the lagged effects of previous policy tightening measures continue to impact global financing conditions. Longer-term bond yields have retreated slightly, aligning with shifting expectations about the path of future interest rates.
Lending standards have tightened, and bank credit growth has slowed sharply. However, equity markets have shown signs of recovery, driven by expectations that central banks in advanced economies have reached the peak of the tightening cycle. Portfolio flows to emerging markets rebounded strongly in the last two months of 2023, supported by expectations that the US Federal Reserve will cut policy rates in the near term.
Domestic Macroeconomic Conditions
At home, there is gradual recovery in economic activity, though growth remains below potential. The latest Ghana Statistical Service data showed an expansion in overall real GDP by an annual rate of 2.0 percent driven by the services and agriculture sectors during the third quarter of 2023, relative to 2.7 percent over the same period in 2022. Nonoil GDP growth moderated to 2.1 percent from 3.3 percent over the same comparative period.
The Bank’s high frequency real sector indicators point to a significant pickup in activity. The updated Composite Index of Economic Activity (CIEA) rebounded strongly with an annual growth of 9.6 percent in November 2023 – the highest in two years – from a contraction of 6.2 percent a year earlier. Domestic VAT, port activity, industrial consumption of electricity, imports, and tourist arrivals all contributed to the improvement in economic activity observed during the period.
The Bank’s latest surveys conducted in December 2023 showed a strong rebound in both consumer and business sentiments, reflective of the signs of recovery. Consumer confidence improved on account of easing inflationary pressures which led to optimism about future economic conditions.
Similarly, business confidence increased significantly, signalling improving consumer demand, as firms met short-term targets and expressed positive sentiments about company and industry prospects. The survey findings were broadly aligned with observed trends in Ghana’s Purchasing Managers’ Index (PMI), which improved to 51.8 in December 2023 from 51.6 in the previous month.
Meanwhile, the disinflation process, which began earlier in the year, continued through to the last quarter of the year supported by strong policies, relative exchange rate stability, and effective liquidity sterilization efforts. Headline inflation sharply decelerated to 23.2 percent in December 2023, from a peak of 54.1 percent at the end of December 2022.
The decline in inflation was driven by both easing food and non-food prices. Food inflation decelerated sharply to 28.7 percent in December 2023 from 59.7 percent in December 2022, while non-food inflation also fell to 18.7 percent from 49.9 percent over the same comparative period.
Core inflation has also eased significantly, affirming broad decline in prices. The Bank’s core inflation measure, which excludes energy and utility, more than halved to 3 24.2 percent in December 2023, down from 53.2 percent in December 2022. Similarly, inflation expectations by the banking sector, businesses, and consumers have declined.
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