At its 120th meeting, the Monetary Policy Committee (MPC) of the Bank of Ghana made the decision to reduce the Monetary Policy Rate (MPR) from 29.0% to 27.0%, marking a significant policy shift. This is the first rate cut since January, a move that reflects improving economic conditions, including easing inflation and strong fiscal performance. The decision was largely driven by the downward trajectory of inflationary pressures, as well as favorable economic growth prospects. The move has raised expectations of more expansive monetary policies in the near term, with both local and international factors shaping the economic landscape.
Cooling Inflation and Market Dynamics
The global economy has shown signs of steady recovery as inflationary pressures continue to ease across multiple regions. One of the key factors contributing to the decline in global inflation has been the decrease in crude oil and food prices. This has been particularly beneficial for Emerging Market and Developing Economies (EMDEs), where these commodities play a crucial role in driving inflationary trends.
In advanced economies, cooling labor markets have also been a significant factor in the reduction of inflation, especially in the services sector. The slowdown in wage growth during the third quarter of 2024 has helped moderate price increases across both goods and services, reducing the need for aggressive monetary tightening in these regions. The US, for example, has seen a deceleration in wage increases, particularly in sectors such as healthcare, education, and hospitality, which has contributed to the moderation of core inflation.
Additionally, the weakening of the US dollar has played a pivotal role in alleviating inflationary pressures in EMDEs. A weaker dollar makes imports more affordable for countries that use their local currencies to purchase goods priced in US dollars. This has had a positive impact on inflation, particularly in countries like Ghana, which rely heavily on imports for essential goods and services. The IMF’s latest projections indicate that global growth will remain stable at 3.2% in 2024 and may rise slightly to 3.3% in 2025, a sign that the global economy is gradually returning to pre-pandemic levels of stability.
Inflation Trends in Ghana: A Gradual Decline
The decision to cut the MPR in Ghana is rooted in the positive inflationary trends observed in the second half of 2024. Inflationary pressures, which had been a major concern for the government, have continued to ease, with the overall inflation rate declining from 22.8% in June to 20.4% by August. This downward trend was primarily driven by a sharp drop in food inflation, which fell from 24.0% in June to 19.1% in August. Food prices have a significant impact on overall inflation in Ghana due to their large weight in the consumer price index (CPI). The reduction in food inflation can be attributed to favorable weather conditions, improved agricultural output, and lower transportation costs.
Non-food inflation also saw a slight reduction, reaching 21.5% in August, compared to 21.6% in June. Although the decline in non-food inflation was not as pronounced as that of food inflation, it nonetheless reflects a broader improvement in price stability across the economy. Additionally, the Bank of Ghana’s core inflation measure, which excludes volatile items such as energy and utility prices, improved significantly, dropping to 19.4% in August from 22.1% in June. This improvement in core inflation is a strong indicator that underlying inflationary pressures are easing, and it provides a solid foundation for the central bank’s decision to cut the policy rate.
Fiscal Performance and Alignment with IMF Program
In addition to the favorable inflationary trends, Ghana’s fiscal performance in 2024 has remained largely aligned with the targets outlined in the IMF-supported program. Provisional budget data for the period from January to July 2024 shows that the primary balance posted a deficit of GH¢3.8 billion, which is equivalent to 0.4% of GDP. This was only slightly higher than the target of GH¢3.5 billion (0.3% of GDP), indicating that the government has been able to maintain fiscal discipline despite the challenging economic environment.
Moreover, the overall fiscal deficit, measured on a commitment basis, was 2.4% of GDP, outperforming the budget target of 2.8%. This stronger-than-expected fiscal performance can be attributed to several factors, including improved tax revenue collection, better management of government expenditures, and the successful implementation of structural reforms aimed at enhancing fiscal sustainability. The government’s commitment to fiscal prudence, as outlined in the IMF program, has played a crucial role in restoring investor confidence and stabilizing the economy.
Accumulation of International Reserves: A Positive Indicator
Another positive development that has supported the central bank’s decision to cut the MPR is the accumulation of international reserves. As of the end of August 2024, Ghana’s Gross International Reserves had risen by US$1.58 billion, reaching a total of US$7.50 billion. This provides the country with 3.4 months of import cover, which is well above the internationally recommended minimum of three months. The accumulation of reserves has been driven primarily by the strong performance of the domestic gold purchase program, which has helped bolster the country’s foreign exchange reserves.
In addition to the increase in Gross International Reserves, Ghana’s Net International Reserves also grew by US$1.73 billion, totaling US$4.92 billion by the end of August. This significant improvement in the country’s reserve position provides a cushion against external shocks and enhances the central bank’s ability to manage exchange rate volatility. The accumulation of reserves is a positive indicator of the country’s economic resilience and strengthens the central bank’s capacity to support the local currency, the cedi.
Impact of the Rate Cut on the Economy
The reduction of the MPR from 29.0% to 27.0% is expected to have a far-reaching impact on various sectors of the economy. One of the most immediate effects of the rate cut is the potential boost to consumer and business confidence. Lower interest rates make borrowing more affordable for both individuals and businesses, which can stimulate spending and investment. For consumers, lower borrowing costs can lead to increased demand for credit, particularly for mortgages, car loans, and personal loans. This, in turn, can drive growth in sectors such as real estate, automobile sales, and retail.
For businesses, the rate cut can provide much-needed relief, especially for small and medium-sized enterprises (SMEs) that rely on credit to finance their operations. Lower interest rates reduce the cost of borrowing, making it easier for businesses to invest in expansion, hire additional workers, and increase production. This can have a positive spillover effect on the broader economy, as increased business activity leads to higher levels of employment and income.
Furthermore, the rate cut is likely to stimulate private-sector credit growth, which has been sluggish in recent months due to high borrowing costs. The reduction in the MPR will lower the cost of credit, making it more attractive for businesses to take out loans for capital investments and working capital. This can lead to increased economic activity, particularly in sectors such as manufacturing, construction, and agriculture, which are critical drivers of Ghana’s economic growth.
Inflation Outlook and Policy Implications
The central bank’s decision to cut the MPR also signals optimism regarding the country’s inflation outlook. The Bank of Ghana has forecasted that inflation will continue to decline in the coming months, with an end-of-year inflation rate projected to be between 13% and 17%. This forecast reflects the central bank’s confidence that the disinflationary trend observed in the second half of 2024 will persist, driven by continued improvements in food supply, stable energy prices, and a favorable exchange rate environment.
The central bank’s inflation forecast is also supported by the broader global trend of easing inflationary pressures. As mentioned earlier, global inflation has been declining due to lower crude oil and food prices, as well as a slowdown in wage growth in advanced economies. This global disinflationary environment is expected to have a positive impact on Ghana, particularly in terms of reducing imported inflation.
In light of these positive developments, it is likely that the central bank will maintain the policy rate at 27.0% at its next meeting, barring any significant changes in the inflation outlook. The decision to hold the rate steady would provide a stable monetary policy environment, allowing the economy to continue benefiting from lower borrowing costs while ensuring that inflation remains under control.
