BoG hikes policy rate to 27 per cent …to contain rising inflation

The Bank of Ghana (BoG) has increased the monetary policy rate by 250 basis points from 24.5 per cent to 27.0 per cent on the back of rising inflation on the domestic and global fronts.

“The inflation forecast shows that in the outlook, inflation will likely peak in the first quarter of 2023 and settle at around 25 percent by the end of 2023. This forecast is conditioned on the continued maintenance of tight monetary policy stance and the deployment of tools to contain excess liquidity in the economy,” Dr Ernest Addison, Governor of BoG announced this at a press conference in Accra yesterday  after the 109th regular at the Monetary Policy Committee (MPC) of the BoG.

Dr Addison who is the chairman of the MPC said “The Committee is of the view that significant upside risks to the inflation outlook remain. To continue to anchor inflation expectations, the Committee therefore decided to increase the policy rate by 250 basis points to 27.0 percent,” and there was the need to increase the MPC rate.

The policy rate is the rate at which the BoG lends to commercial banks in the country.

He said on the global level, global headline inflation remained elevated and had broadened beyond food and energy prices, with several other factors adding to inflationary pressures.

That, he said, included tighter labour market conditions, the pass-through effects of currency depreciations to inflation, and supply chain cost pressures, stressing that the International Monetary Fund projected global inflation to reach 8.8 percent by the end of 2022, before gradually declining to 4.1 percent in 2024.

“Global financing conditions have tightened further, reflecting in large part the aggressive policy rate increases across several Advanced Economies to re-anchor the persistent rise in inflation. The US dollar has strengthened, and longer-term bond yields have risen sharply because of sustained policy tightening in response to high inflation concerns. This has triggered currency pressures and volatility in equity markets across Emerging Markets and Developing Economies,” Dr Addison, stated.

On the domestic front, the Governor said inflation had remained elevated, with strong underlying inflationary pressures.

He said price developments suggested that the upturn of headline inflation in October 2022 was driven largely by food price pressures and to some extent additional pressures from the currency depreciation.

Dr Addison explained that since the last MPC meeting, headline inflation had  increased further to 40.4 percent in October 2022, from 37.5 percent in September and food inflation increased by 4.9 percentage points to 43.7 percent in October 2022 from 38.8 percent in September, while non-food inflation increased by 1.3 percentage points to 37.8 percent from 36.5 percent.

“Underlying inflationary pressures have also heightened further. The Bank’s measure of core inflation, defined to exclude energy and utility prices, increased from 36.2 percent in September 2022 to 39.7 percent in October 2022, an indication of broad-based inflationary pressures. At the same time, consumer, business, and financial sector inflation expectations went up,” the Governor, said.

Dr Addison said economic activity on the domestic front had moderated somewhat with the High frequency indicators monitored by the Bank signaled some moderation in economic activity in the third quarter, relative to the first two quarters of the year.

He said the Bank’s Composite Index of Economic Activity (CIEA) contracted by 1.2 percent in September 2022, compared with 11.1 percent growth, a year earlier and the main indicators that dragged down the Index were domestic VAT, ports activity, and cement sales.

“There are however some risks to this forecast that would have to be monitored, including additional pressures from the proposed VAT increase, and exchange rate pressures. Continued vigilance to the evolution of these potential price pressures in the outlook will be key,” Dr Addison said.


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