The Bank of Ghana’s Monetary Policy Committee (MPC) is poised to deliver a potential policy rate cut in its upcoming meeting, with strong expectations of a reduction between 1.0% and 1.5%.
This anticipated rate adjustment comes as a result of recent developments in inflation, global monetary policies, and the overall economic outlook for Ghana.
At the core of this expected policy shift is Ghana’s improving inflation rate, which fell unexpectedly to 20.4% in August 2024. According to a report by IC Research, the research arm of IC Securities, the decline in inflation has substantially strengthened the case for a cut in the Bank of Ghana’s Monetary Policy Rate (MPR).
Inflation, a critical indicator of economic stability, has been a driving force behind the central bank’s policy decisions, and its steady decline provides a solid foundation for a more accommodative monetary stance.
Inflation rates in Ghana had surged in recent years due to a mix of domestic factors and external pressures, such as supply chain disruptions, currency depreciation, and rising global commodity prices.
As the situation began to stabilize and inflationary pressures eased, the Bank of Ghana responded with gradual policy rate cuts to stimulate economic growth while balancing inflation control.
The August 2024 Inflation rate marks a significant improvement and suggests that disinflation may continue in the coming months. This favorable inflation trajectory has created room for the central bank to further ease monetary conditions by reducing the policy rate, which currently stands at 29.5%.
US Federal Reserve Rate and Global Monetary Influence
Another key factor influencing the MPC’s dovish outlook is the anticipated cut in the US Federal Reserve’s interest rate. The Federal Reserve has maintained a relatively tight monetary policy in recent years, but with growing signs of slowing inflation and a softening labor market in the United States, the Fed is widely expected to reduce its interest rate in the near future.
A cut In the US interest rate is likely to narrow the interest rate differential between the US dollar and the Ghanaian cedi, which could support a reduction in the Bank of Ghana’s policy rate.
Lower US interest rates generally ease pressure on emerging market currencies like the cedi, as it reduces the relative attractiveness of US dollar-denominated assets compared to local currency investments.
IC Research emphasized that an earlier cut in the US Federal Reserve rate makes a strong case for Ghana’s central bank to follow suit. The timing of the Fed’s anticipated rate cut, which may occur before the Bank of Ghana’s MPC meeting, adds further pressure for Ghana to reduce its policy rate between 1.0% and 1.5%.
By doing so, the central bank would not only provide relief to the domestic economy but also ensure that cedi-denominated assets remain attractive to investors.
Real Policy Rate Comparisons and Regional Context
Ghana’s real policy rate, which measures the central bank’s policy rate adjusted for inflation, is also higher compared to its peers in the region.
According to IC Research, Ghana’s ex-post real policy rate stands at 8.6%, slightly higher than Kenya’s real rate of 8.35% and Uganda’s rate of 6.50%. This places Ghana in a relatively favorable position when it comes to maintaining investor confidence while implementing a rate cut.
With the expectation that inflation will continue to decline in September 2024, IC Research forecasts that Ghana’s ex-ante real policy rate could rise to 10.0%.
This further strengthens the argument for a reduction in the nominal policy rate, as Ghana’s real rate remains high enough to absorb a policy cut without risking capital flight or undermining the attractiveness of cedi-denominated investments.
Implications for the Economy
A cut in the policy rate by up to 1.5% would have several positive implications for Ghana’s economy. Most notably, it would reduce borrowing costs for businesses and individuals, stimulating investment and consumption. This could lead to higher economic growth as businesses expand operations and consumers increase spending.
Lower interest rates would also ease the burden on the government’s debt servicing costs. Ghana has been grappling with a high debt burden in recent years, and a reduction in borrowing costs could help the government redirect funds towards essential services and infrastructure projects.
Additionally, a lower policy rate could provide much-needed relief to small and medium-sized enterprises (SMEs), which have been disproportionately affected by high interest rates. With reduced borrowing costs, SMEs could access credit more easily, enhancing their capacity for growth and job creation.
The dovish sentiment surrounding the central bank’s outlook signals a move toward more accommodative monetary conditions, which could boost economic growth, lower borrowing costs, and support investment.
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