Macro Analysis /

Ghana: MPC delivers another 250bps policy rate hike as inflation is yet to peak

  • Central bank sees strong underlying inflation pressures, risks on headline to the upside

  • Inflation is projected to peak in Q1/2023 and settle at around 25% at the end of next year

  • Upside inflation risks are substantial from proposed VAT rate hike and exchange rate

28 November 2022

The Central Bank of Ghana delivered another 250bps hike, taking the key policy rate to 27.0%, governor Ernest Addison announced on Monday (Nov 28) after the MPC meeting last week. The central bank said inflationary pressures were strong and the underlying risks persisted, assessing the risks on the inflation outlook to the upside. We remind that prior to its November meeting, the MPC had implemented a total of 1,000bps rate hikes since March. The MPC noted there was evidence that policy rate increases in the past few months have helped to tame the monthly inflation prints from 5.1% in May to 1.9% in August. However, this was reversed in the months of September and October on account of additional shocks from export petroleum prices, utilities and transport fares, producing an inflation rate of 40.4% y/y in October dragging along core prices which rose almost at par with headline inflation, the governor added.

The central bank forecast that inflation was likely to peak in the first quarter of 2023 and settle around 25% by the end of 2023. This forecast is conditional on a tight monetary policy stance and is subject to significant upside risks, particularly from the proposed VAT increase and the exchange rate. Data released earlier indicated that the cedi depreciated by as much as 54.2% so far this year and capital and financial outflows more than offset the improvement on the trade account leaving a BoP gap of 5.1% of GDP and causing an unsustainable drain on FX reserves which covered only 2.9 months of import at the end of October.

In terms of the domestic economy, the central bank said short-term indicators suggested activity was easing and that economic sentiments were softening in the third quarter. Households were pressured from high inflation and the rise in interest rates, while businesses were impacted by the reduction in domestic demand, the depreciation of the local currency and the uncertainty in the economic outlook.