BoG Expected To Increase Policy Rate

Razia-KhanRazia Khan, Regional Head, Research, Africa, Standard Chartered Bank, says the bank expects the Bank of Ghana to raise its Policy Rate by 100 bps to 17 per cent when it announces its decision after a review of the economy tomorrow.

“Even if the assumption is that inflation is driven primarily by one-offs, utility and fuel subsidy adjustment  as the Bank of Ghana has suggested and that these one-offs may well prove to be temporary given the weakness of demand in Ghana in our view, tightening now would still be the correct thing to do,” she said.

In a report on the bank’s expectations on the Bank of Ghana’s meeting tomorrow she argued that first, with inflation accelerating to 13.5 per cent year on year in December, and at risk of rising further, policy had become a lot more accommodative in real terms.

Ms. Khan said tightening by 100 bps now would arguably offset only partially some of the rise in inflation seen since the last rate hike.

“In real terms, policy remains accommodative especially taking the magnitude of the fiscal deficit into account. Cedi weakness poses additional risks to inflation, even if growth is judged to be relatively subdued.  But a rate hike would send a strong message about the Bank of Ghana’s commitment to price stability,” she said.

She said while rate tightening on its own was probably not going to be sufficient to single-handedly restore stability to the Foreign Exchange market  it would  nonetheless be an important complement to other efforts by the authorities to raise the attractiveness of cedi-denominated assets.

She said  in the absence of any tightening, the risk was that the announcement of other measures aimed at stabilising the cedi would be sub-optimal.

“If the Bank of Ghana fails to tighten further now, and should the Ghana ceid remain under pressure, the risk is that inflation might become more generalised, and the Bank of Ghana will have to tighten even more aggressively further out,” she said.

This she said would raise the cost of domestic debt service in Ghana significantly, potentially crowding out other spending, and weakening growth arguing “ for Ghana, this is not an option”.

“The growth trade-off from a modest tightening now is far less severe than an aggressive tightening later, which might put at risk government spending.  Should inflation in fact improve over the coming months, then there is nothing to stop the Bank of Ghana from reversing any rate hike further out.  For now though, inflation is accelerating, and we expect to see a policy response,” she said.

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