The Monetary Policy Committee (MPC) of the Bank of Ghana (BoG) has responded swiftly to recent economic challenges by increasing the policy rate by 250 basis points to 17 percent in its 105th regular meetings.
The Bank of Ghana cited the combination of tighter global financing conditions, sharp pressures on the exchange rate, and elevated inflation as posing some policy challenges to the outlook, hence the decision to hike the policy rate.
According to the Bank of Ghana, the Sovereign credit rating downgrades of Ghana by Fitch and Moody’s led to widened yield spreads on both cedi-denominated Government of Ghana bonds and the country’s Eurobonds. The Committee stated in its statement that these downgrades reflect market and investor concerns about fiscal and debt sustainability.
“Consequently, the Ghana Cedi has come under severe pressure as offshore investors exited positions in domestic securities at a time when domestic demand for forex has increased, reflecting both real and speculative demand. This has caused the exchange rate to overshoot its long-term trend. The strengthening of the US dollar, liquidity pressures, uncertainties regarding budget implementation, portfolio reversals by non-residents and some speculative pressures are key contributory factors”.Bank of Ghana
Headline inflation rose sharply to 15.7 percent in February 2022, and both headline and core inflation are significantly above the upper limit of medium-term target band. BoG stated that the uncertainty surrounding price developments and its impact on economic activity is weighing down business and consumer confidence.
Meanwhile BoG warned that the risks in the outlook for inflation are on the upside and include petroleum price adjustments and transportation costs, and exchange rate depreciation. The Bank’s latest forecast still depicts an elevated inflation profile in the near term, with inflation falling within the medium-term target band within a year.
Fiscal policy under strain
On the fiscals, BoG stated that fiscal policy implementation has come under strain, reflecting embedded rigidities in the fiscal framework which will require extensive structural reforms to free fiscal space to restore both fiscal and debt sustainability.
“Revenue performance has been slow to align with projections, while expenditure remains rigid downwards despite the strong efforts to cut expenditure by 20 percent as announced by the Government. The above have resulted in financing constraints which would have to be resolved very swiftly to ensure the announced fiscal consolidation path is achieved”.Bank of Ghana
Nonetheless, the MPC expressed optimism that ongoing discussions will lead to very decisive policy reforms that will address underlying fiscal mismatches and restore some calm in the markets. This, together with the monetary policy decision and additional measures, should help re-anchor inflation expectations, BoG assured.
Banking sector remains strong
Per the Committee’s assessments, the banking sector’s performance remains strong, with sustained growth in total assets, investments and deposits. Key financial soundness indicators such as profitability, liquidity and solvency remain healthy. Asset quality improved slightly, although there are upside risks to the outlook, requiring continued monitoring to address early signs of stress within the sector, BoG stated. The Committee further highlighted that the steady increase in private sector credit growth has continued with positive growth implications.
On the international front, the Committee stated that the global economy has entered a period of profound uncertainty and fragility. This is because the Russia-Ukraine war has introduced new uncertainties which have complicated the outlook and aggravated the COVID-related supply bottlenecks, elevated inflation expectations, and triggered higher crude oil prices, compounding the already high global inflationary pressures.
The Bank of Ghana stated that global financing conditions have tightened as key central banks raised policy rates to counter rising inflation. The combined effect of these developments could lead to further downgrades in global growth projections, increase investor uncertainty, and lead to capital outflows from emerging and frontier economies with weak fundamentals and could have severe exchange rate implications, the Bank of Ghana warned.