Fitch Solutions, a leading provider of credit intelligence and Ratings has projected that Ghana’s inflation will remain uncomfortably high the third quarter of 2023.

Fitch Solutions, while reacting to Ghana’s recent policy hikes, explained that the policy rate hike coupled with the rise in value-added tax will cause the county’s inflation to remain high in the 3^rd quarter.

“That said, inflation will remain uncomfortably high through Q323, discouraging policymakers from loosening monetary policy at the September MPC meeting. We believe that the introduction of higher taxes – including the January hike in value-added tax to 15.0%, from 12.5% before – will put upside pressure consumer prices, likely slowing the disinflation process.

“In addition, upward adjustments to electricity tariffs by Ghana’s Public Utilities Regulatory Commission (which increased electricity prices by 18.4% y-o-y in Q223) and an increase in fuel prices in July will keep the pace of disinflation slow over the coming months. Indeed, our forecast that inflation will average 39.4% in 2023 – from 31.5% in 2022 – is partly predicated on price growth averaging 37.9% in Q323, well above historical levels and the BoG’s inflation target range of 6-10%.”
Fitch Solutions

Outlook for Next Meeting

The Rating Company highlighted the outlook for next Monetary Policy Meeting (MPC), noting that it expects that the Bank of Ghana (BoG) will keep the policy rate on hold at its next MPC meeting in September 2023.

“While inflation rose in both May and June we expect the disinflation process to resume in Q323. Upside pressure to price growth in recent months has primarily been caused by a weak exchange rate compared with 2022. Indeed, the cedi averaged GHS11.14/USD in Q223, as against GHS7.67/USD in Q222, pushing up prices of imported goods and services on a year-on-year basis.

“Given our view that significant exchange rate weakness is unlikely over the remainder of 2023 due to IMF funding and stronger investor sentiment, the impact of imported inflation on the headline figure should start to dissipate in Q323.”
Fitch Solutions

Long-Term Interest Rate Trajectory

Fitch Solutions projected the long-term interest rate trajectory. It indicated that BoG will commence a monetary easing cycle in Q423, cutting the benchmark policy rate by 200bps to 28.00% by year-end.

“Inflation will moderate rapidly in Q423 as a result of favourable base effects. The cedi sold off rapidly in Q422, suggesting that the currency will be significantly stronger in Q423, sharply reducing imported pressures on a year-on-year basis. This informs our forecast that inflation will fall below the 30.0% mark by November, meaning that real interest rates will return to positive territory for the first time since January 2022. As a result, we expect central bank policymakers to adopt a more relaxed monetary policy stance at the last MPC meeting of 2023 (scheduled for November).”
Fitch Solutions

Fitch stated that softening economic growth will also encourage policymakers to cut interest rates towards the end of the year. It moreover, projected real GDP to slow in the 2023.

“We forecast that real GDP growth will slow to 3.0% in 2023, well below the five-year pre-pandemic average of 5.3%. Following rapidly rising interest rates, real client loan growth has contracted by an average of 20.7% in the first four months of 2023 (latest available data), pointing to deteriorating domestic conditions.

“Still-high inflation and contractionary fiscal policy will also depress domestic demand. With this likely to reflected in the Q223-Q323 GDP outturns, the BoG will seek to adopt more expansionary monetary policy towards the end of 2023.”
Fitch Solutions

Contrary to analyst’s consensus expectations that the Bank of Ghana would hold the interest rate at 29.50%, the BoG did indeed hike the policy rate by the 50-basis point (bps) to 30.00%. However, Fitch expected a resumption of the monetary tightening cycle soon as inflation quickened in May and June (to 42.5% y-o-y).