Market tilts toward policy rate retention

The Bank of Ghana Monetary Policy Committee (MPC) faces a pivotal decision in its upcoming meeting scheduled from September 19th to 22nd.

With inflation showing signs of easing, market watchers favour a retention of the key policy rate. After three consecutive months of upticks since May 2023, headline inflation for August reversed course… easing to 40.1 percent year-on-year, a drop of three percent from July.

This marks the lowest inflation rate thus far in 2023, with the slowdown in August erasing the increases recorded since May.

GCB Capital is projecting that the policy is likely to remain rate-neutral through the next two policy meetings, with anticipation of a potential pivot in Q1 2024 if disinflation strengthens as expected in Q4 2023.

“A sharp decline in headline inflation in September 2023 could narrow the negative real returns and reset interest rate expectations lower,” he said.

GCB Capital further stated that with inflation at 40.1 percent, there is theoretically a more than 10 percent monetary policy gap – which leaves room for further policy-tightening. However, it believes the causes of inflation transcend demand-pull.

Its analysis underscores the potential for continuous disinflation through the fourth quarter of 2023 while acknowledging the risks posed by rising petroleum prices and quarterly utility tariff adjustments, but expects base drift effects to trigger sharper declines in inflation beyond September.

“We expect the ongoing macroeconomic and structural reforms – particularly the front-loaded fiscal tightening, debt reforms and the memorandum on zero-deficit financing – to anchor the disinflation process,” it said.

The inflation print in August-2023 reflects the decaying lag impact of the revenue and tariff adjustments and effects of the main crop harvest season on food prices. Inflation from the food and non-food baskets recorded sharp declines from the July-2023 print, while the month-on-month numbers show deflation across the food, non-food and overall inflation prints in Aug-23.

Constant Capital also chimed in, emphasising caution: “The over-1,000 basis points hike in the Monetary Policy Rate (MPR) progressively over the past year has partly limited economic output more recently, and caution will be advised where there are any positive developments in prices; especially given the fiscal limits and contraction expected from the Ministry of Finance under the IMF programme”.

Constant Capital added: “While we note the further upward adjustment in utility tariffs effective from September 1, 2023 and recent increases in ex-pump petroleum prices, we see scope for further moderation of headline inflation in September 2023 into the near-term”.

Apakan Securities meanwhile revised its outlook to an interest rate-hold decision by the MPC ahead of the September meetings this week. It attributes this decision to the decline of headline inflation in August, along with expectations of further easing in September.

“The headline inflation decline in August has improved real return conditions, but still remains in negative territory. The policy rate-inflation spread hovers at -1,010 basis points, while the 91-day bill inflation-spread stands at -1,308 basis points,” it stated.

Analysts expect yields on Treasury bills to continue surging in the upcoming auction, mainly driven by demand and supply dynamics in the short-term debt market.

The market also anticipates that food inflation will continue to moderate in September 2023, aided by the ongoing harvest season. A relatively stable cedi and expected additional foreign exchange inflows – such as US$800million from this year’s COCOBOD debt syndication and a US$600million disbursement under the IMF ECF post-first programme review – are also projected to impact general price levels positively in the near-term.

Apakan Securities commented on the inflation outlook, stating:

“We think the steep fall in food costs for August 2023 suggests an initial sign of a positive outturn from the ongoing food harvest season earlier than anticipated. This is expected to extend into September 2023. Thus, we now view the inflation path tilting toward the downside for the next month,” Apakan Securities commented.

As the MPC meeting approaches, market players will closely watch for any signals of policy direction, but the prevailing sentiment suggests a cautious approach – leaning toward a policy-hold as the country navigates its economic challenges amid ongoing efforts to stabilise prices.