Bank of Ghana Holds Monetary Policy Rate Steady Amid Economic Recovery

Bank of Ghana Holds Monetary Policy Rate Steady Amid Economic Recovery

The Bank of Ghana has chosen to hold the monetary policy rate steady at 30%, indicating that the country’s lending rate will remain unchanged. This decision is the outcome of reviewing the current economic state, marking the second instance in the year that the rate has been held constant, following a similar decision taken in May 2023.

The monetary policy rate was last increased by 50 basis points in July due to inflationary pressures. However, as inflation eased in August, market expectations were that the policy rate would be maintained. According to the Governor of the Bank of Ghana, Dr. Ernest Addison, all core inflation measures monitored by the central bank are trending downwards, showing a continued reprieve from underlying inflationary pressures.

Expedited Disinflation Process Amid Global Pressures

The central bank’s decision to hold the policy rate aims to accelerate the disinflation process in the face of anticipated global pressures. Despite the resumption of the disinflation process, which should gradually return to the target band over the medium term, barring any unforeseen shocks, potential risks to the inflation outlook persist. These risks include rising international crude oil prices and adjustments to utility tariffs, which need to be managed through vigilant monetary policy.

The Monetary Policy Committee has noted the overall improvement in macroeconomic conditions, with strong economic growth and a drop in inflation in August. These developments provide evidence that the policy mix under the three-year International Monetary Fund (IMF) Extended Credit Facility is beginning to yield results. Economic activity is rebounding strongly, the exchange rate is stabilizing, inflation is declining, and the level of foreign exchange reserves has improved.

Continued Disinflation Expected

The Committee expects the disinflation rate to continue. However, it is prepared to respond appropriately if inflation deviates from these broad expectations. The Committee further reiterated that while the expectation is for continued disinflation, it stands ready to respond appropriately should inflation deviate from these broad expectations.

The strong growth observed in the first half of 2023 is expected to continue into the third quarter, as indicated by the July 2023 update of the Bank’s Composite Index of Economic Activity (CIEA). Also, Ghana’s Purchasing Managers Index (PMI) supports the growth outlook, reflecting improving business conditions.

Challenges in Fiscal Policy Implementation

Despite the consistency of policies with the IMF-supported programme, challenges associated with revenue mobilization persist and will require additional efforts to safeguard the revenue-led fiscal adjustment programme. The country’s external sector position has continued to improve significantly in the first eight months of the year, supported by a current account surplus reflecting higher gold export receipts, import compression, and lower outflows from the services and income accounts.

On inflation dynamics, the continued maintenance of a tight monetary policy stance and relative exchange rate stability have contributed significantly to the disinflation process observed in the year thus far. Headline inflation has declined by a cumulative 14.0 percent since the peak of 54.1 percent recorded in December 2022. All core inflation measures monitored by the central bank are trending downwards, indicating continued easing of underlying inflationary pressures.