Rate-cut window narrows on inflation pressures

Room for further monetary policy easing is narrowing after inflation accelerated for a second consecutive month in May, reinforcing concerns within financial markets that the Bank of Ghana (BoG) may have to extend its pause in the rate-cut cycle despite inflation remaining below the medium-term target band.

Headline inflation rose to 3.7 percent year-on-year in May from 3.4 percent in April according to data from Ghana Statistical Service, while month-on-month inflation increased to 1.1 percent from 1 percent.

The latest reading marks the strongest monthly inflation outturn since February 2025 and suggests that underlying price pressures are beginning to rebuild after a prolonged period of disinflation.

The acceleration was driven by a combination of food, energy and imported cost pressures. Food inflation increased to 3.3 percent from 2.2 percent in April, supported by higher prices for vegetables, tubers and prepared foods.

At the same time, housing, water and energy costs remained a major source of inflationary pressure, rising 11.8 percent year-on-year.

The data present a more complex backdrop for BoG ahead of its next Monetary Policy Committee (MPC) meeting in July.

At its May meeting, the MPC unanimously voted to maintain the policy rate at 14 percent, arguing that risks to the inflation outlook were broadly balanced despite a modest rise in inflation. The committee also tightened liquidity conditions by replacing the dynamic Cash Reserve Ratio framework with a uniform 20 percent reserve requirement effective June 4.

However, the May inflation print has shifted attention toward whether policymakers still have sufficient space to resume easing in the near-term.

Analysts at Databank Research attributed the latest inflation increase largely to cost-push pressures filtering through the economy. Rising fuel prices, higher utility costs and a turnaround in imported inflation from negative territory earlier this year contributed to broader price increases across the consumer basket.

The research firm expects inflation to accelerate further in June, forecasting a range between 5.29% and 5.56% – citing persistent high energy costs, an uptick in food prices, recent cedi weakness and continued pass-through effects along domestic supply chains.

Apakan Securities similarly noted that inflationary momentum is strengthening despite the relatively low annual headline rate.

The brokerage attributed May’s increase partly to unfavourable base effects and the cedi’s 7.65 percent monthly depreciation, which raised imported price pressures.

Food prices were particularly affected by supply-side disruptions. Fresh tomato prices surged during the lean harvest season and trade disruptions from Burkina Faso, while monthly food inflation accelerated to 2 percent from 0.8 percent in April.

Although lower fuel prices helped moderate some non-food inflation categories during May, analysts expect inflation risks to intensify in June as higher transport fares, fuel price adjustments and elevated global commodity prices begin feeding into consumer prices.

These concerns closely mirror arguments advanced by MPC members during the May policy deliberations.

Several committee members warned that escalating geopolitical tensions in the Middle East, rising crude oil prices to above US$100 per barrel and disruptions to global supply chains could reverse some of Ghana’s recent disinflation gains.

One MPC member cautioned that inflation could exceed 10 percent by year-end under a scenario of sustained high oil prices, arguing that premature easing could eventually force the central bank into a more disruptive tightening cycle.

Others pointed to increasing inflation expectations among households and businesses, pending utility tariff adjustments and emerging foreign exchange demand pressures as reasons for maintaining a cautious policy stance.

The inflation outlook is also becoming intertwined with exchange-rate developments.

Despite a strong external position, including a trade surplus exceeding US$5billion and gross international reserves of US$14.4billion by mid-May, the cedi has faced renewed pressure this year.

On a year-to-date basis through June 3, the central bank has reportedly supplied more than US$5.7billion to the foreign exchange market – yet the currency has weakened by about 11.5 percent.

By comparison, BoG sold approximately US$2.9billion during the same period in 2025 when the cedi appreciated sharply.

Market analysts argue that reserve sales alone cannot sustain exchange-rate stability without broader confidence in macroeconomic fundamentals. The implication for monetary policy is significant: a weaker currency could amplify imported inflation pressures, particularly if global energy prices remain elevated.

For now, financial markets appear to be adjusting expectations away from near-term rate cuts. The MPC minutes indicate that while some members still see scope for policy rate realignment over the medium-term, all six members judged that prevailing risks warranted a pause.

Importantly, committee members repeatedly emphasised the need to keep inflation expectations anchored and preserve policy credibility as the country transitions from its IMF-supported programme toward a post-programme policy framework.

The July MPC meeting is therefore likely to focus less on the current inflation rate and more on whether emerging cost pressures, exchange-rate developments and global energy markets threaten the medium-term inflation trajectory.

If June inflation rises in line with market forecasts, the central bank may find that the policy space which existed earlier this year has narrowed considerably – extending the pause in monetary easing and reinforcing its focus on price stability and inflation-expectation management.

During the 2026 IMF/World Bank meetings, monetary policy was highlighted as constrained amid the ongoing geopolitical happenings.

The IMF said that preserving price stability remains the primary policy anchor, with central banks expected to act decisively to prevent inflation expectations from becoming unanchored.

The Fund stated that monetary authorities “should be ready to act decisively in line with their mandates to prevent prolonged supply shocks from destabilising medium-to-long-term inflation expectations”, while retaining flexibility to accommodate temporary shocks where appropriate.