The Monetary Policy Committee (MPC) of the Bank of Ghana(BoG) after maintaining the 19% policy rate with the assurance of Governor Ernest Addison that there were signs the widespread inflation may be leveling off, decided to hold an August emergency meeting to review recent economic developments, which continues to be characterised by inflationary hikes and “heightened pressures in the foreign exchange market”.

This positions the BoG as the second in Africa after Uganda, to call an emergency MPC meeting to address a fall in its currency coupled with strong inflationary pressures, since Russia’s invasion of Ukraine and post COVID-19 era.

The policy makers in their press release announced a hawkish approach in a bid to tackle inflation and arrest the accelerated depreciation of the Ghana cedi, by raising the policy rate by 300 basis points to 22%, the biggest increment since2002 when the central bank was granted the independence to set interest rates. This sums up Ghana’s rates increase to 750 basis points alone this year.                                                                                                  

The market approaches

Some Economic analyst view market approaches with symbolic animal names such as the Optimistic-Bull, Pessimistic-Bear, Higher Rates-Hawk, Lower rates-Dove, and the Centrist. Like how a hawk behaves in its attempt to arrest its prey, the approach by the MPC can be classified as hawkish since it employs less stimulus and uses higher rates to clampdown inflation. With this approach, the central bank’s policymakers talk about raising interest rates and slowing down economic growth, with the ultimate goal of easing inflationary pressures.

Ghana’s headline inflation accelerated for eleven consecutive months to 31.7% in July2022, mainly emanating from food and fuel inflation. The MPC statement indicated that the cedi declining rate was 25.5% year-to-date.   

However, according to the Ranking of 150 currencies by Bloomberg as of August 17, 2022,the rate of depreciation of the Ghanaian cedi was 36.5%. The Ghana Cedi is considered in ranking, as the world’s second-worst performing currency, after Sri Lanka’s rupee. This confirms the assertion that “The cedi drop is also fueling Ghana’s inflation”

Inflation is expected to continue to rise following the announcement by Regulators that water and electricity tariffs will increase to 22% and 27% respectively from next month. This adds to the persistent food and fuel inflation. Will this Hawkish rate spike by the MPC succeed in arresting the swift pace inflationary pressures?

Other MPC Adjustments

Apart from the policy rate regulations, the central bank also regulates reserve requirements of commercial banks and the operations on the open market. This is all in a bid to influence the amount of money in circulation and how much it costs to borrow.

Apart from the policy rate hike to 22%, the Bank of Ghana will gradually increase the primary reserve requirement of banks from 12% to 15% to be implemented in a phased manner as noted below:

i.             13%from 1st September 2022

ii.            14%by 1st October 2022

iii.           15%by 1st November 2022

Central Bank plans to buy foreign exchange from companies.

The MPC also announced measures to boost foreign-exchange reserves and support the cedi. According to the MPC press statement, the Bank of Ghana will work collaboratively with the mining firms, international oil companies, and their bankers to purchase all foreign exchange arising from the voluntary repatriation of export proceeds from mining, and oil and gas companies. This they believe will boost the supply of foreign exchange to the economy, and strengthen the central bank’s foreign exchange auctions

The MPC in its statement acknowledged that the execution of the budget for the year has remained challenging because revenue has not met expected projections, and this is creating financing challenges. In the absence of access to the international capital market, due to downgraded credit rating, non-residents disinvestment in local currency bonds, and given the constrained domestic financing, central bank overdraft has helped to close the financing gap, but the Bank of Ghana is working with the Ministry of Finance to agree on a cap for the overdraft.

At the end of June 2022, gross reserves totaled $7.7 billion. Analysts predict that Ghana’s gross reserves may decline below $6 billion by end of year, making the IMF-program talks crucial for the balance of payments.

The concluding question here then is, will this MPC release be enough to support the collapsing currency as the nation and investors await a loan from the International Monetary Fund? 

Ina nation that’s been priced out of the global financial markets and has been buffeted by accelerating inflation, a widening budget deficit and rating downgrades, the latest measures may be insufficient to support the currency, therefore the ongoing discussions with the IMF are projected to help address the underlying macroeconomic challenges, restore fiscal and debt sustainability, and provide sustainable balance of payments cushion.