Policy Rate: Fitch Solutions revises benchmark rate to 30.5% at end-2023

The Bank of Ghana has once again demonstrated its commitment to combatting inflation by hiking its policy rate to 29.5%, surprising many analysts and prompting Fitch Solutions to revise its end-2023 policy rate forecast to 30.5% from 29.0% previously. The move marks a cumulative increase of 1,500 basis points since November 2021, making the Bank of Ghana one of the most hawkish central banks globally.

In a statement, the Monetary Policy Committee highlighted the need to “re-anchor inflation expectations” and suggested that further tightening may be necessary. This view is shared by Fitch Solutions, which anticipates a 100 basis points increase at the May 2023 MPC meeting, given persistently high inflation levels. Despite a slight decline in February 2023, inflation remains stubbornly high at 52.8% year-on-year, which is five times higher than the Bank of Ghana’s target range ceiling of 10.0%.

The recent policy rate hike is expected to result in continued high borrowing costs for businesses and individuals, with Fitch Solutions noting that loans are likely to remain expensive in the coming months. This could have a knock-on effect on the broader economy, particularly if businesses are unable to access affordable credit to fund growth and investment.

Furthermore, signs of economic weakness are beginning to emerge, which could further discourage the Monetary Policy Committee from tightening policy further. Fitch Solutions notes that the MPC may be mindful of the need to support economic growth and job creation, particularly in the face of global uncertainty and ongoing challenges posed by the Covid-19 pandemic.

Despite these challenges, the Bank of Ghana’s commitment to achieving price stability is laudable, particularly given the long-standing issue of inflation in the country. While further tightening may be necessary in the short term, policymakers will need to balance this against the need to support economic growth and job creation in the longer term. Ultimately, the success of the Bank of Ghana’s efforts to combat inflation will depend on a range of factors, including global economic conditions and domestic policy responses.