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More room for policy rate hikes – Databank

Inflation Arrow Inflation at the end of last year was propelled into double-digits

Wed, 26 Jan 2022 Source: thebftonline.com

Amid surging consumer inflation that rose to 12.6 percent at the end of 2021, Databank is projecting more room for the central bank to hike its policy rate in 2022.

Inflation at the end of last year was propelled into double-digits largely through the impetus of supply-side shocks amid heightened cost pressures.

However, during 2021 headline inflation decelerated sharply to 7.5 percent in May, helped by a favorable base effect within the food basket and a stable exchange rate.

This prompted a 100bps cut in the policy rate to 13.5 percent in May-21, pulling down yields across Treasury securities.

Ahead of the 104th Monetary Policy Committee (MPC) meetings, the asset management company in its Ghana Market Review and Outlook for 2022 suggests a policy hike of 150 basis points this year, as the Bank of Ghana signaled its commitment to price stability with a 100bps hike in the policy rate in November 2021.

“We believe there is scope for more rate hikes in 2022, potentially up to 150bps. As inflation surged in the second half of 2021, the real policy rate declined to 1.9 percent at end-2021 v 4 percent at the start of 2021,” Databank said. “This makes the policy regime appear loose, elevating demand and upside risk to price levels.”

The investment firm estimates that a cumulative tightening of up to 150bps could be required to limit the price pressures and restore the real policy rate (which is the difference between inflation rate and policy rate) to 4 percent, with a low risk to growth.

“We believe the cost pressures and supply-side bottlenecks, which are the primary drivers of recent inflation, are largely beyond the immediate reach of monetary policy.

However, we view the policy rate hike as necessary to signal the central bank’s commitment to price stability in 2022 and re-anchor inflation expectations in the market,” Databank remarked.

Inflation outlook

Inflation reversed course in the second half of 2021, as the supply-side shocks and cost pressures heightened after the favorable base effect waned at mid-2021. Although the Bank of Ghana reversed the earlier cut in the policy rate to 14.5 percent in November 2021, inflation continued northward closing 2021 at 12.6 percent.

Accordingly, Databank forecast 2022 inflation to range within 8.9 percent to 10.9 percent; and a midpoint of 9.9 percent above the government’s target of 8 percent.

Source: thebftonline.com
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