By Elorm Desewu
With the recent hike in the US interest rate to 3.75 percent, the Monetary Policy Committee, (MPC) of the Bank of Ghana, (BoG) is likely to raise the policy rate further.
The Federal Reserve last week increased the benchmark rate to its highest in 14 years. The bank hopes pushing up borrowing costs will cool the economy and bring down price inflation.
The BoG has from November 2021 increased the policy rate to about 1000 basis points or 10 percent to settle at 24.5 percent in attempt to control the rising inflation as well as stem the speed depreciation of the Ghana cedi.
Already, the Bank of Ghana is projecting a higher inflation due to the currency depreciation, and the recent upward adjustments in utility tariffs, transport costs, as well as general price increases.
The revised forecast assumptions, together with worsening external financing conditions, heightened inflation expectations, and rising production costs are likely to shift inflation further upwards in the near term, the Bank of Ghana said in its report.
The current assessment of inflation outlook largely points to significant upside risks, occasioned by price pressures from both domestic and foreign sources. Price pressures in the global economy have elevated and unfolded beyond the volatile items of energy and food, reinforced by the transmission effects of persistent global supply chain challenges and the Ukraine war. These have triggered aggressive monetary policy tightening in advanced economies with some spillovers on the domestic economy.
On the domestic front, the upward adjustments in petroleum products and transport fares with associated second-round impacts on goods and services as well as the pass-through of currency depreciation have exerted significant upside risks on inflation and heightened inflation expectations. On the downside, however, it is expected that the harvest season and tight monetary policy stance would moderate some inflationary pressures in the medium-term.
Consistent with development in headline inflation, underlying inflation pressures also remained heightened, suggesting that price pressures have become more broad-based than before.
The Bank’s core inflation measure, which excludes energy and utility prices, increased to 32.6 percent in August 2022 from 30.2 percent in July. Nevertheless, trends in month-on-month inflation suggested a consistent deceleration for the third consecutive time. The monthly headline inflation declined to 1.9 percent in August 2022, down from 3.1 percent in July and 3.0 percent in June respectively.
Month-on-month food inflation similarly dropped to 1.8 percent in August, from 3.3 percent in July and 2.3 percent in June 2022. Also, non-food monthly inflation decelerated to 2.0 percent in August 2022 from 3.0 percent in July, and further down from 3.6 percent in June 2022
The increase in interest rate would make investing in the US economy better than Ghana, leading to capital flight and a stronger dollar.
