Fitch Solutions expects the Bank of Ghana (BoG) to continue its monetary tightening next year by raising its benchmark interest rate by a further 50 basis points (bps) to 15% by the end of 2022, after hiking it by 100 bps at its November 2021 meeting.
According to Fitch Solutions, risks to the outlook are tilted towards a larger interest rate hike by the BoG than its current forecasts indicate. Fitch Solutions cautions that should oil prices trend higher than its Oil & Gas team’s forecasts currently indicate, transport inflation would accelerate further, pushing up headline price growth, and prompting the central bank to implement a larger increase to its benchmark policy rate next year.
“At Fitch Solutions, we expect that the Bank of Ghana (BoG) will raise its benchmark interest rate by a further 50 basis points (bps) to 15.00% by the end of 2022. On November 22, the BoG hiked the interest rate by 100 bps to 14.50% at its final monetary policy committee (MPC) meeting of 2021, following holds at the previous two meetings and a 100bps cut in May”.
Fitch Solutions
Risks of inflation
In its MPC statement, the BoG cited elevated inflationary risks, and a subsequent need to re-anchor inflation expectations as the primary reason for tightening its policy rate. Price growth accelerated from 10.6% year-on-year in September to 11.0% in October, driven largely by an increase in fuel prices, as well as the inflationary pressures stemming from currency depreciation.
Fitch Solutions expects Inflation to remain elevated in 2022, at an average of 8.6%, and above the mid-point of the BoG’s 6.0-10.0% target range, thus incentivizing another hike. This, according to Fitch Solutions, reflects sustained high fuel prices forecasts to average USD72.0/bbl in 2022, up from USD71.5/bbl in 2021, and higher import costs due to a weakening cedi, forecast to weaken by 4.9% to an average of GHS6.23/USD in 2022.
Moreover, Fitch also expects the BoG to remain concerned about upside inflationary pressures stemming from rising government spending, and continuing global supply challenges.
Economic growth
Regarding economic growth, Fitch Solutions expects Ghana’s economy to gather momentum in the coming quarters, thus providing the central bank with room to focus on containing inflation, which it expects to remain subject to upwards pressure in 2022.
“We expect economic growth to accelerate in 2022, thus providing room for the BoG to focus on inflation targeting and supporting the cedi. Economic activity has been recovering, with real GDP growth in Q221 (latest available data) coming in at 3.9% y-o-y”.
Fitch Solutions
While Q3 2021 GDP growth data has not been published at the time of writing, Fitch Solutions stated that BoG’s Consumer Confidence Index increased from 91.8 in August to 93.9 in October, and the Business Confidence Index increased from 93.2 in August to 95.5 in October (scores above 100 indicate improving conditions), indicating that it is still below the expected levels.
“Our Pharmaceuticals team expect vaccinations to accelerate next year, with most priority groups likely to be vaccinated by end-2022. This, together with improving labour market conditions (we forecast unemployment falling from a forecast 4.4% in 2021 to 4.1% in 2022) will bolster consumer confidence, and see private consumption growth accelerate from 3.8% in 2021 to 4.7%”.
Fitch Solutions
Fitch Solutions highlighted in its latest outlook that the mining sector will also perform well in 2022, bolstering fixed investment and exports (our Mining team expects gold output to rise by a robust 4.0% to 5.0mn ounces). As a result of these factors, “we forecast that real GDP growth will rise from 4.2% in 2021 to 4.8% in 2022, allowing the BoG to tighten further”.
US Federal Reserve
A further factor that Fitch Solutions expect to influence Ghana’s monetary policy in 2022 will be the US Federal Reserve.
“We expect the Fed to hike its funds rate target range by 25bps in response to rising inflation, which our Global team expects to remain higher and stickier than previously expected”.
Fitch Solutions
This, Fitch Solutions said, will put pressure on the BoG to maintain Ghana’s interest rate differential with the US, with the view to stemming capital outflows and supporting the currency.
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