Ghana is poised to extend its steepest-ever phase of interest-rate hikes on Monday to put a lid on lofty inflation and shore up its currency.
Most economists surveyed by Bloomberg predict the monetary policy committee will lift the key rate by 200 basis points, one forecasts an increase of 250 basis points and two a hold. The MPC has already doubled interest rates since November 2021 as it deals with its worst inflation shock in decades.
A hike of that size would be the largest of any central bank so far this year.
The MPC prefers to keep interest rates above inflation in order to attract investment. The upswing in prices has left Ghana with the third most negative real rate in the world after Turkey and Sri Lanka.
The annual inflation rate is quintuple the 10% ceiling of the central bank’s target range and has risen 13.7 percentage points since the MPC last met in November. Monthly inflation averaged 6.2% in the last two months of 2022, the highest level between MPC meetings held in the current tightening cycle.
“We expect the Bank of Ghana to hike its policy rate by 200 basis points from 27% to 29% at its January meeting, following 250-basis point hikes at the two prior meetings,” Bojosi Morule and Andrew Matheny, economists at Goldman Sachs Group Inc., said in an emailed response to questions. The latest inflation readings are “quite elevated in both sequential and annual terms, suggesting that further monetary policy adjustment is required,” they said.
Another factor for a hike would be the considerable weakness in the cedi from mid-December highs, even if it is stronger than it was at the time of the last MPC decision, the economists said. That’s because it “implies ongoing pressures from an inflation and reserves perspective,” they said
The local currency has depreciated by more than a quarter against the dollar since Ghana suspended interest payments on its external debt on Dec. 19. The move caught bondholders by surprise ahead of restructuring talks aimed at unlocking an International Monetary Fund bailout it’s seeking to address precarious public finances and support the cedi.
Complicating the calculus is the potential IMF program, concerns about economic growth and expectations on when inflation will peak.
“We recognize a risk that the Bank of Ghana will deliver less than we expect, owing, in our opinion, to an expectation that an upcoming IMF program will significantly contribute to macroeconomic stability,” Morule and Matheny said.
Economic growth slowed to 2.9% in the third quarter of last year from 4.7% in the prior three months and is likely to remain muted due to the debt crisis and spending pressures. S&P Global Market Intelligence forecasts that the economy will expand 3.5% this year, down from 4.6% projected for 2022.
Governor Ernest Addison at the MPC’s November meeting forecasted inflation will peak this quarter and settle around 25% by the end of 2023, “conditioned on the continued maintenance of a tight monetary policy stance and the deployment of tools to contain excess liquidity in the economy.”