Ghana: Putting monetary easing on hold - Capital Economics
Africa Economics

Ghana: Putting monetary easing on hold

Africa Economics Update
Written by Virag Forizs

We think that a recent string of on-target inflation data and a less accommodating external environment will delay further interest rate cuts in Ghana. But monetary loosening will probably resume in 2021.

  • We think that a recent string of on-target inflation data and a less accommodating external environment will delay further interest rate cuts in Ghana. But monetary loosening will probably resume in 2021.
  • Data released this week showed that headline inflation softened a touch from 7.9% y/y in December to 7.8% y/y in January. The latest figure follows a series of readings that also hovered around the 8% mid-point of the central bank’s target range. (See Chart 1.) Inflation has probably stabilized; price pressures seem to have steadied across the food and non-food categories over the past half year.
  • We suspect that this trend will continue over the coming months. The scope for further falls in the headline rate is probably limited; recent readings are the lowest on record. Whereas we previously expected two rate cuts in 2020, we now think that policymakers will stay on the sidelines this year.
  • Of course, it’s hard to know for sure given the recent change in calculating the inflation rate. In August 2019, Ghana’s statistical agency expanded the list of goods and services included in the CPI basket and updated the reference year from 2012 to 2018. The result was a step change in the series; inflation dipped from 9.5% y/y in July 2019 to 7.8% y/y in August. Uncertainties surrounding the effect of the rebasing add another reason for the Bank of Ghana to pause its easing cycle.
  • Policymakers have additional reasons to hold back. First, external conditions are less accommodative than in 2019. Central banks in advanced economies are retreating from last year’s monetary loosening, which provided a supportive external environment for interest rate cuts in emerging markets. The US Federal Reserve for example, will probably hold its policy rate steady throughout 2020 and 2021.
  • Second, looser fiscal policy will give Ghana’s economy a boost, removing some pressure to cut interest rates. The authorities tend to overspend in election years, and with polls due in late-2020, we think that fiscal slippage is almost certain. The news of a wider deficit could alarm investors, triggering a fall in the currency. We expect that the cedi will weaken to 6.5/$ by year-end from the current 5.3/$.
  • Third, policymakers, wary of capital outflows, will not want to exacerbate the cedi’s fall with further rate cuts. Investors would quickly look elsewhere in search for higher yields if the benchmark rate was lowered. After all, policymakers’ surprise rate cut in January 2019 triggered a sharp currency depreciation. In the following month, the cedi weakened against the US dollar by almost 8%. (See Chart 2.)
  • Taken together, we think that the key policy rate will remain at 16.00% this year. The Bank of Ghana will probably want to lower rates eventually to push the real rate lower. In mid-2011, when inflation was last below 9%, the benchmark rate stood at just 12.50%. And as more clarity emerges regarding the effects of inflation rebasing, we think that policymakers will resume their easing cycle. We’ve pencilled in a 50bp cut in 2021, which would take the rate to 15.50%.

Chart 1: Consumer Prices & Key Policy Rate

Chart 2: Exchange Rate (GHS per USD)

Sources: GSS, BoG, Refinitiv, Capital Economics

Sources: Refinitiv, Capital Economics


Virág Fórizs, Emerging Markets Economist, +44 20 7808 4079, virag.forizs@capitaleconomics.com