The Monetary Policy Committee of the Bank of Ghana has announced a hike in the policy rate by 150 basis points to 29.5 percent from an earlier 28 percent announced in January this year.
The decision comes after the Central Bank held its second meeting of the year last week to review economic developments in the country. Governor of the Bank, Dr. Ernest Addison explained that the hike is due to rising inflationary shocks which are expected to persist as Ghana awaits an IMF-supported programme.
“Global growth is projected to decline in 2023 to 2.9 percent, down from the 3.4 percent in 2022 (according to recent IMF projections released in January 2023). The projected slowdown comes on the back of persistent elevated inflation levels, tightened financial conditions, and uncertainty stemming from the lingering effects of the Russia-Ukraine war.
“The onset of the recent turmoil in the banking sector in the U.S. and Europe is likely to further cloud the outlook. The above notwithstanding, latest Purchasing Managers’ Indices (PMI) pointed to some rebound in economic activity in February 2023, reflecting the moderation in price pressures, improved supply chains, and the re-opening of China’s economy. But it is unclear yet how the recent banking sector crises in the U.S. and Europe would impact this initial rebound.”
Dr. Ernest Addison
Further explaining the reasons for the hike, BoG explained that global financial conditions eased somewhat in early 2023 as slower growth and moderating inflation in advanced economies led markets to price in further reduction in the pace of future policy rate hikes.
“More recently, the U.S. Federal Reserve, European Central Bank, and the Bank of England have all increased their respective policy rates, albeit at a slower pace, but with commitment to maintain a tight monetary policy stance until inflation is contained.
“Meanwhile, concerns that inflation may stay elevated for longer than previously anticipated kept long-term bond yields high, while fears about global growth prospects and the hawkish posture of central banks in advanced economies amid the ongoing turbulence in the banking system, have triggered volatility in the equities market.”
Dr. Ernest Addison
Cost of Borrowing to Go Up
Meanwhile, the hike means that the cost of credit will continue to remain high, affecting household spending and private sector growth.
Average lending rates shot up marginally to 36.64% in February 2023, from 35.58% recorded in December 2022. This is equivalent to 3.02% interest rate on loans per month.
The Governor of the Bank of Ghana, Dr. Ernest Addison, asserted that the ease in price pressures abroad will likely impact positively on Ghana’s domestic inflation profile going forward. He noted that the recent Domestic Debt Exchange Programme (DDEP) has impacted negatively on banks, hence the need for the Central Bank to make necessary adjustments to its regulatory requirements to support the banks.
“Whiles the domestic economy still faces relatively tight global financing conditions and heightened uncertainty about the global economic outlook, the effects of these could be amplified inherent vulnerabilities including structural and excess liquidity following the DDEP and the widening negative outlook gap”.
Dr. Ernest Addison
Dr Addison, however, added that the Monetary Policy Committee of the Bank of Ghana will continue to monitor developments within the banking industry to reduce the downside risks to the economy.
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