The Monetary Policy Committee (MPC) of the Bank of Ghana has announced in a press conference today, Monday, November 22, 2021, the increment of its policy rate by 100 basis points to 14.5 percent, up from 13.5 percent. This means the policy rate is ending the year at the same rate it started.

The Bank of Ghana cited inflationary risks as one of the major factors that influenced the committee’s decision to raise the policy rate. This marks the second time this year that the BoG has changed its policy rate; first, a reduction of 100 basis points in May 2021 to cushion the economy as it recovers from the pandemic.

The Monetary Policy Committee, last week, held its 103^rd meeting, the last meeting for the year, climaxed by a press conference today. The Committee deliberated on recent global and domestic macroeconomic conditions since the September 2021 meeting, and assessed risks to the inflation and growth outlook.

Inflation above upper limit

Headline inflation has risen consistently from the low of 7.5 percent in May 2021 to 11.0 percent in October driven by both food and non-food price increases. Correspondingly, BoG noted that all of its core measures of inflation have increased, indicating broad-based underlying inflation pressures, with the potential of de-anchoring inflation expectations.

“Currently, headline inflation is above the upper limit of the medium-term target band and the Committee noted significant risks to the inflation outlook. These risks include rising global inflation, high energy prices, uncertainties surrounding food prices and investor behavior”.
Bank of Ghana

The Committee further noted that these elevated inflationary risks, required prompt policy action to re-anchor inflation expectations to safeguard the central bank’s price stability objective.

Real sector developments

In the domestic economy, the Committee assessed that the recovery in the real sector was progressing at a steady pace. High frequency economic indicators reflect increased momentum in the pace of economic activity, close to pre-pandemic levels.

According to the BoG, consumer and business sentiments have turned around, driven by perceived improvements in economic prospects, although consumers expressed concerns about current household finances. Credit to the private sector is beginning to expand, albeit at a slow pace, the BoG remarked.

The COVID-19 related macro-prudential measures, still in force, remain supportive of the recovery process, steadily driving up new advances over the period, the Central Bank stated. According to the BoG, the recovery in credit is expected to continue on the back of anticipated net ease in credit stance by banks and increased demand.

Debt sustainability concerns

The MPC indicated that the country’s sovereign bond spreads widened markedly between its last and current meetings as investor sentiments shifted based on fiscal and debt sustainability concerns, prompting some sell-offs by investors with spillovers on the domestic foreign exchange market.

This triggered some currency pressures in the past two months as demand for the U.S. dollar increased, BoG highlighted. However, the adequate reserve levels provided some buffers and supported a much slower depreciation pace compared with pre-pandemic levels, it added.

In the outlook, the Committee is of the view that the strong reserve buffer level should provide some assurance to the market and help abate investor concerns, as the country’s external payment position remains strong.