Tighter policy rate to persist until inflation firmly anchors

The Bank of Ghana Monetary Policy Committee (MPC) is set to uphold its ‘tighter-for-longer’ policy stance until inflation is firmly anchored, amid rising geopolitical tensions affecting oil prices and a year-end consumer inflation rate of 23.2 percent.

In 2023, consumer inflation experienced a noteworthy drop of 30.4 percent – closing the year at 23.2 percent and surpassing both government’s target of 31.3 percent and the IMF’s central forecast of 29.4 percent. Despite the positive trend, inflation remains elevated compared to the medium-term target of 8±2 percent.

The latest central bank projections indicate a continued disinflation process – supported by a robust monetary policy, a stable exchange rate and base drift effects. The central bank emphasises its commitment to vigilance in monitoring potential risks for the disinflation process.

Addressing recent developments since the last committee meeting, heightened tensions in the Middle East and disruptions in the Suez Canal pose additional challenges. A Reuters report notes that oil prices surged by 3 percent following air and sea strikes by the United States and Britain on Houthi targets in Yemen. With the Suez Canal handling about 12 percent of worldwide trade, weeks of disruptions have already impacted global businesses; leading to a 1.3 percent decline in global trade from November to December 2023.

Brent crude futures were up US$2.21, or 2.9 percent, at US$79.62 a barrel at 13.50 GMT; while U.S. West Texas Intermediate crude futures climbed US$2.13, or 3 percent, to US$74.15.

The main transmission conduits for these global uncertainties will be through energy prices, exchange rates, inflation and interest rates, especially if the Middle East conflict expands to involve Iran.

Gita Gopinath, First Managing Director-IMF, warns central banks about the potential challenges in addressing inflation trajectories, especially in the face of financial stresses. She emphasises the need for vigilance and preparedness in navigating the complex economic landscape, considering the possibility of a stagflationary environment.

“If inflation proves to be stubborn or escalates due to unforeseen shocks, it may necessitate higher interest rates for an extended period – or even lead to rate increases. This could result in a situation where there is an inflation problem while simultaneously experiencing a significant slowdown in economic growth. Such a scenario is known as a stagflationary environment, and it should not be dismissed as a possibility. Therefore, there is a need for vigilance and preparedness in addressing potential challenges in this complex economic landscape,” she said.

Market expectations

Market expectations suggest a divergence from the BoG’s current tight monetary policy stance in 2024, anticipating a shift toward a more accommodative approach. Apakan Securities notes that the continuous disinflationary process in 2023, coupled with a favourable inflation outlook, could prompt the central bank of Ghana to ease its policy stance in 2024. However, the securities firm remains cautious in Q1-2024, highlighting potential upside risks in the inflation outlook and election-related spending pressure in the upcoming election year.

GCB Capital in its review of the December 2023 inflation print said: “While we argued initially that monetary policy could pivot from March 2024, amid the urgent need for stimulus for growth, substantial risks to the inflation outlook could keep the monetary policy tighter for a bit longer. We now expect the Monetary Policy Committee to defer its first interest rate action to the May 2024 policy window, particularly as inflation is expected to reverse course in the March 2024 data window.

“Accordingly, we see up to three interest rate cuts in 2024 to around 26 percent as the central bank balances the risks to inflation and growth. T-bill yields should also continue the steady decline through Q1 2024, with anticipated inflows from multilateral partners for budgetary support expected to ease the immediate appetite for short-term borrowing and usher in an aggressive yield compression strategy,” GCB Capital forecast.

Balancing risks, Apakan Securities also predicts the possible initiation of a loosening monetary policy stance by the BoG in Q2-2024, aligning with the broader trend among central banks globally in 2024. Despite this, positive real returns persist with a decline in the headline inflation rate to 23.2 percent for December 2023; resulting in an improved real return condition (“91-day bill-inflation”) at 599bps from 310bps. This creates an investment opportunity for investors, and the positive real return gap suggests room for government to trim yields in the upcoming money market auction.