The Bank of Ghana will continue its policy rate hiking cycle, by raising the benchmark indicator to 24% by the end of 2022.

According to Fitch Solutions, inflation will remain elevated - driven by the rapid depreciation of the cedi - and will only peak in the final quarter, incentivising the Central Bank to remain aggressive over the coming months.

This will result in further increase in the cost of borrowing.

The international research firm pointed out that the Bank of Ghana would tighten monetary policy further as a condition of a likely International Monetary Fund (IMF) deal, and forecast that the Central Bank will increase the benchmark interest rate by 3 percentage points to 27% in 2023.

“The MPC's decision to increase the policy rate signals growing concerns about inflation, informing our projection of an additional increase of 200 bps [basis points] over the remainder of 2022 (950bps cumulatively)”.

In August 2022, the BoG in an emergency meeting increased the policy rate by 300 basis points to 22% address the risks to the inflation outlook and the rapid depreciation of the cedi.

Inflation will remain elevated over the coming months and the exchange rate weakness will continue to be the key driver of inflationary pressures in the near term.

“Exchange rate weakness will continue to be the key driver of inflationary pressures in the near term. S&P Global and Fitch Ratings downgraded Ghana in August [2022], further weakening investor sentiment and putting additional downward pressure on the cedi”.

In addition, it said the increase in water and electricity tariffs which took effect on September 1, 2022 will add to the already elevated inflationary pressures.

"With Ghana being dependent on imported fuel, machinery, vehicles and cereals, sharp losses of the cedi will continue to drive up import costs that will be largely passed on to consumers. In addition, the Ghanaian Public Utilities Regulatory Commission announced a 27.2% and 21.6% hike in electricity and water tariffs respectively, which will take effect on September 1 and add to already elevated inflationary. As such, we believe that inflation will continue to accelerate in the next two-three months and have revised up our 2022 average inflation forecast to 27.3%, from 25.0% previously".

Capital flight to trigger increase in policy rate

Fitch Solutions further said capital flight will also incentivize the BoG to maintain a hawkish bias in the upcoming MPC meetings. 

Ghana's capital and financial account recorded $1.3 billion in net outflows in first-half of 2022, compared with net inflows of $3.0 billion over the same period in 2021, primarily driven by portfolio reversals.

“While we believe this is in part caused by weak investor sentiment, the combination of a stronger dollar and higher interest rates in developed markets are also key factors, weighing on the attractiveness of emerging market assets. In an attempt to limit further capital flight and ease pressure on the cedi, we believe that the BoG will continue raising the benchmark interest rate through year-end”.