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Business News of Saturday, 26 November 2022


IEA projects 200 basis points hike in BoG policy rate to 26.5%

Dr. John Kwabena Kwakye, Senior Economist and Director of Research at IEA play videoDr. John Kwabena Kwakye, Senior Economist and Director of Research at IEA

The Institute of Economic Affairs (IEA) has projected a hike in the Monetary Policy Rate by 200 basis points to 26.5 percent by the Bank of Ghana

Chairman of the Monetary Policy Committee and Bank of Ghana Governor, Dr Ernest Addison is expected to address journalists on Monday November 28, 20220 to announce the decision taken after the Committee held its final scheduled meeting of this year.

Ahead of the announcement, the IEA believes that the forecasted hike is due to the widening gap between inflation and the policy rate which has compelled commercial banks to seek funds from BoG at much cheaper rates while lending to government at higher rates.

In a statement issued by the Institute, it explained the possible hike the Policy Rate (PR) will impact the cost of lending and the cost of doing business in the country.

“The decision regarding the PR is rather tricky—and challenging—at this time. We note that a significant gap has opened between the PR, at 24.5%, and inflation, at 40.5%. This is not uncommon. However, it rather unusual, especially in the Ghanaian context, where the real PR has been, more often than not, positive. Similarly, the PR has fallen far behind Treasury Bill rates, which are over 35%”, the statement signed by the IEA Director of Research, Dr. John Kwakye read.

“This has caused misalignment between the rates and increased the potential for “round-tripping,” to the extent that it is possible for banks to access Central Bank funds at cheaper rates and on-lend to the government at higher rates. It is also the case that major economies, such as US and UK, have further tightened their policies, increasing the pressure on the currencies of emerging markets and developing countries”, it explained.

The IEA however pointed out that the government and the Bank of Ghana are not adopting the adequate intervention measures aimed at controlling inflation which has been spiraling and resulting in policy rate hikes throughout the year.

“Already, interest rates have reached prohibitive levels and hurting the real economy as the cost of doing business has escalated. Reducing the growth projection for 2022 from the original 5.8% to 3.7% in the Mid-Year Budget attests to a slowing economy”.

“Our view is that inflation may go up further in November [2022], reflecting the pipeline pressures, before possibly slowing in December [2022], reflecting the slight decrease in fuel prices and a measure of stability on the foreign exchange market”.

Further making a case for the policy rate hike, the IEA noted that the move become necessary in order to “consolidate the incipient stability and reassure the markets of the strong commitment to fighting inflation. From that standpoint, I [IEA] expect the PR to be increased by 200 basis points to 26.5%”.

Meanwhile, the MPC at its last meeting in October this year hiked the monetary policy rate by 250 basis points from 22 percent to 24.5 percent.

The move according to the central bank was to stem inflation which has been soaring in recent months due to the depreciation of the cedi, upward adjustments in tariffs and Ghana awaiting to access an IMF-supported programme.