The Monetary Policy Committee of the Bank of Ghana decided after its 106th meeting in May 2022 to raise the policy rate by 200 basis points representing 19% from the earlier 17% rate due to the continuous elevated inflation emanating from Russia-Ukraine war, China’s zero-Covid policy, and adverse impacts of policy turnarounds by advanced economies. These global situations have worsened global supply chains, contributed to food and energy price hikes, rendering the global growth prospects uncertain.

Headline inflation in several advanced, emerging markets and developing economies, have breached set targets with some recording high levels in decades. The response by many central banks to the inflation hikes has been a more tightened monetary stance, which further tightens global financial conditions and negatively impacts emerging markets and developing economies.

Where does Ghana stand?

According to the Ghana statistical service, inflation surged from 19.4% in March to 23.6% in April, which is reflected in almost all components of the consumer market from both domestic and imported sources, with non-food inflation rising from 17% to 21.3%, and food inflation rising from 22.4% to 26.6%.The confidence survey conducted in April showed a dip in both consumer and business confidence on account of food and fuel prices, transportation cost, and currency depreciation, which has resulted in higher input costs for businesses.

Stock of Ghana’s public debts have increased from 76.6% to 78% of GDP by end of march, with domestic debt accounting for 37.8% and external debt 40.2%. Ghana’s cedi depreciated by 15.6% against the US Dollar, 13.1% against British pound, and 13.6% against Euro. However, moderations in depreciation have been recorded between April and May showing 15.8%, 8.2%, and 8.9%, respectively.

In contrast to the above conditions, Ghana’s economy has showed a post pandemic rebound with strong GDP growth rates and forecasts. The strong pick up of the economic activity is largely driven by the services and Agric sectors. The BoG’s Composite Index of Economic Activity (CIEA) showed that growth will persist, mainly driven by increase in exports, recovery of credits to private sector, an uptick in industrial sector, higher tourist arrivals, and improvements in domestic VAT suggests increase in demand.

The banking sector also remains robust, with sustained growth in total assets, strong financial soundness, investments, and deposits. Credit to private sector showed improvement but the latest conditions reveal banks beginning to tighten credit stance on loans, but demand for credit by household and firms is projected to remain strong. Developments in the money market also saw upward trends, attributed to moderation in liquidity conditions in various market segments. However, growth in money supply - M2+ (foreign currency deposits) slowed in April, due to contraction in Net Foreign assets of banking sector, despite expansion in domestic assets.

There has been increase in trade because of positive impacts from favorable price trends, making export inflows outweighing imports, and in the end offsetting investment income outflows.

We are dealing with a situation of a combination of demand-pull inflation; from the economic recovery because of end of COVID lockdowns, and a cost-push inflation due to higher oil prices, supply bottlenecks, and rising commodity and food prices. This is a difficult situation for policy makers.

The increase in policy rate from 17% to 19% will influence inflation on the demand side but will it ultimately reduce inflation on the supply side? It can be regarded as an attempt to tackle the inflation situation, however this attempt has the potential to reduce GDP, since this new policy rate will increase cost of borrowing and discourage consumer spending and private investment.

Better supply side policies will help increase productivity and provide a more lasting approach even though this will take a long time to have effect.