Bank of Ghana Raises Monetary Policy Rate Amid Global Uncertainty and Inflation Threat
The Monetary Policy Committee (MPC) of the Bank of Ghana (BoG) has announced an increase in the Monetary Policy Rate (MPR) by 50 basis points (0.5 percent), taking it from 29.5 to 30 percent. This decision was made in light of the prevailing uncertainty in the global economic outlook and the potential threat of rising inflation in both the global and local economies.
The policy rate serves as a benchmark for commercial banks in the country, determining the rate at which the BoG borrows from them and, subsequently, the rate at which they lend to the public.
The MPC noted that while global growth had shown some signs of improvement at the beginning of 2023, the near-term prospects remained uncertain due to tight financing conditions and elevated underlying inflation. The committee also highlighted the elevated risks to the inflation profile in the local economy, primarily driven by the second-round effects of food prices.
In light of these considerations, the MPC decided to raise the Monetary Policy Rate by 0.5 percent to 30 percent. This move aims to proactively address the potential risks associated with inflation and the global economic climate.
Speaking at a press conference after the announcement, Dr Ernest Addison, the Governor of the Bank of Ghana and Chairperson of the MPC, stated that global financing conditions remained tight in advanced as well as emerging market economies. This is attributed to the repercussions of aggressive monetary policy tightening on bank funding costs and credit conditions.
While headline inflation has been on a downward trend across many countries, primarily influenced by tighter and coordinated monetary policy, easing energy and food prices, and reduced supply bottlenecks, persistent cost pressures in labor markets have contributed to persistent core inflation.
The policy stance of major advanced economies is expected to remain tight until inflation declines to their central bank target ranges. This has adverse implications for financing conditions in emerging and frontier markets, including Ghana.
Regarding the domestic economy, Dr Addison mentioned that although inflation is anticipated to decrease in the near term, baseline forecasts indicate a slightly elevated profile in the coming year. If not adequately addressed, this could lead to embedded inflationary pressures. Therefore, decisive and appropriate policy measures are essential to prevent these risks from affecting the disinflation process.
Dr Addison explained that after a consistent decline from January to April, headline inflation increased in May and June due to various factors such as higher food prices, the implementation of new tax measures, and utility tariff adjustments.
In April, overall inflation stood at 41.2 percent, which increased to 42.2 percent in May and further rose to 42.5 percent in June 2023.
He noted that Ghana’s macroeconomic framework necessitates firm tightening from both the fiscal and monetary angles to firmly anchor inflation expectations on a declining path.
The Governor highlighted the significant improvement in Ghana’s external sector position during the first half of the year, driven by a current account surplus resulting from higher gold receipts, import compression, and lower investment income payments.
Additionally, the domestic gold purchase program, increased voluntary repatriation by the mining sector, and the liquidation of some short-term external liabilities further contributed to substantial external buffer accumulation.
The outlook for reserve accumulation in the second half of the year is expected to remain positive, with anticipated inflows from cocoa syndication and other multilateral sources such as the World Bank and the African Development Bank (AfDB).
In conclusion, the Bank of Ghana’s decision to raise the Monetary Policy Rate reflects its commitment to proactively address the potential threats posed by inflation and the global economic uncertainties. The MPC will continue to closely monitor incoming inflation data and respond adequately as necessary to ensure inflation remains under control.
