Bridgewater Insights | 11th October 2022
The outcome of the Monetary Policy Committee (MPC) meeting held last Thursday; 6th October 2022 has been a further hike in Monetary Policy Rate (MPR) by 250 basis points to 24.5%. The Governor of the Bank of Ghana, Mr. Ernest Addison mentioned that this intervention was key to curb inflation and reduce the rate at which the cedi was depreciating. It must be noted that in August 2022, the MPR was increased for the same reasons, and this marks the second highest policy rate (250 basis points) in the past five years following August’s increase by 300 basis points.
It appears the last policy rate hike had minimal effect on inflation as it peaked to 33.9% in August 2022 from31.7% in the previous month. The Governor also mentioned that the increase in policy rate was part of measures taken in the interim while discussions on the IMF support program are reached and finalized.
Source: GSS, Bank of Ghana, and Bridgewater Analysis.
The Ghana Cedi on the one hand has depreciated by 37.5 percent, 24.1 percent, and 27.5 percent against the US dollar, the pound, and Euro, respectively in the year to September 2022. The Governor gave an assurance of a positive outlook for the cedi attributing factors such as the loan from Afreximbank of US$750 million, the signing of the syndicated Cocoa Loan of US$1.13 billion, and the agreement with gold and oil companies to purchase the repatriated foreign exchange earnings of about US$83.9 million as measures that will help stabilise the exchange rate.
Developments in other Advanced and Emerging markets
Since the onset of 2022, the global financial markets have been characterised by rising interest rates and uncertainty. According to the IMF, both advanced and emerging markets will not be spared from the tightening of monetary policies as it posited ‘curbing inflation’ as the focus for policy makers in the months ahead. Last month, the Bank of England increased its policy rate by 0.5 percentage points to 2.25% with the hopes of returning inflation to a target of 2% sustainably in the long term. In that same month, the Norges bank also increased its policy rate from 1.75% to 2.25% to keep inflation low and stable while hinting there may be a further increase in November 2022.
Countries like Australia and India that maintain a daily policy rate have also witnessed a hike in rates in the past ten days. India ended September with a hike from 5.4 to 5.9% while Australia started the month of October with 2.35% and a current figure of 2.6% as of 10th October 2022. In Nigeria, the policy rate was increased by150 basis points to 15.5% from 14% in September 2022 and cash reserve requirement for banks to 32.5%.
Overall, in consideration of rising risks and uncertainties, the IMF in July 2022 has pegged the Global GDP growth at 3.2%for 2022.
Suboptimal Economic Activities but signs of growth
Ghana’s second quarter GDP’s growth of 4.8% as compared to 4.2% recorded in the same period last year per GSS release, signals growth on the domestic front. The Service and Industry sectors were the major contributors of GDP. Again, the Composite Index of Economic Activity (CIEA) recorded an annual growth of 0.5 percent in July 2022, compared to 1.6 percent in June 2022, and 5.0 percent in December 2021 backing the country’s growth position.
The month of August 2022 also ended with a trade surplus of US$1.7 billion, far exceeding the surplus of US$892.4 million recorded for the same period in 2021 due to higher receipts from gold, crude oil, and non-traditional exports.
Although the expectation of the masses is for the economy to recover progressively from its woes, the current economic activities provide glimmers of hope for growth amidst high inflation and worsening currency.
Ghana’s Central Bank has been ranked as the second most aggressive after Zimbabwe on the continent due to the cumulative rate increases to 10percentage points this year alone. With the IMF negotiations expected to conclude by the end of the year, and a scheduled MPC meeting for November 2022, the puzzling question remains: Will the Monetary Policy Committee further raise the policy rate if inflationary pressures persist, or would the rate be maintained with the hope that the pressures will be lessened by IMF’s monetary support?
Although the response may not be clear, one thing remains, the Central Bank will not relent in its effort to aggressively curb inflationary pressure, restore the economy, and boost investor confidence.
