IEA predicts 1% policy rate hike

The Bank of Ghana (BoG) is expected to increase its benchmark policy rate by 100 basis points to 28 percent when its Monetary Policy Committee (MPC) announces its decision later today, following the conclusion of its 123rd meeting, according to Dr. John Kwakye, Director of Research at the Institute of Economic Affairs (IEA).

The MPC meeting marks a significant moment for the central bank’s new leadership. During his swearing-in ceremony on February 25, 2025, newly appointed Governor Dr. Johnson Pandit Asiama pledged to transform the central bank’s approach to monetary policy.

“We will adopt a more proactive and precise approach to managing inflation, leveraging on advanced data analytics and artificial intelligence,” Dr. Asiama stated during his inauguration.

“Also, we will coordinate policy efforts with other government agencies – for example to manage food prices,” he further stated.

However, Dr. Kwakye – a former member of the central bank’s MPC – believes the move would signal a firm stance against inflation, which remains stubbornly above target amid growing concerns over currency stability and declining Treasury bill yields.

“My consideration of the several foregoing competing factors leads me to the conclusion that the balance of risk in Ghana currently lies more with inflation than economic growth,” Dr. Kwakye stated.

“I am therefore inclined to expect the MPC to go for a hike in the PR by 100 basis points from 27 percent to 28 percent,” he added.

This expectation comes as Treasury bill yields experienced a sharp decline last week, raising concerns about the real returns on short-term government securities. The 91-day, 182-day and 364-day Treasury bill (T-Bill) rates last week fell by 186 basis points (bps), 204 basis points and 101 basis points week-on-week to 15.86 percent, 16.93 percent and 18.97 percent respectively.

These rates stand in stark contrast to the first week of 2025, when the 91-day, 182-day and 364-day bills settled at 28.33 percent (+14bps), 28.96 percent (+5bps) and 30.17 percent (+2bps), respectively.

The precipitous decline in yields has heightened investor concerns over negative real rates of return, particularly in an environment where inflation remains elevated. With end-February inflation at 23.1 percent – well above the central bank’s target range of 6 to 10 percent – returns on short-term government securities have fallen into negative territory in real terms.

Government missed its 2024 end-year inflation target of 15 percent with December 2024 inflation rising to 23.8 percent, up from 23 percent in November – primarily driven by increases in food prices.

This represented the fourth consecutive monthly rise after a five-month decline from the 23.2 percent recorded at the end of 2023.

The current inflation figure of 23.1 percent for February 2025 remains substantially above both historical targets and the ambitious new goal set by Finance Minister Dr. Casiel Ato Forson during the 2025 budget presentation.

The minister projected an end-period inflation rate of 11.9 percent by December 2025, suggesting significant monetary tightening may be necessary to achieve this target.

The exchange rate remains another source of vulnerability, despite recent signs of stability. The cedi (GH¢) depreciated by 28 percent in 2023 and 19 percent in 2024, with an additional 5.4 percent decline recorded between January 1 and March 18, 2025. The weakening currency, coupled with lower T-Bill rates, has raised concerns over capital flight as investors seek more stable foreign assets.

“The exchange rate’s vulnerability has been heightened by the sharp drop of over 10 percentage points in Treasury bill rates over the last few weeks, which threatens causing investors to flee in search of foreign exchange as a safer haven,” Dr. Kwakye warned.

While economic growth showed improvement in 2024 – expanding by 5.7 percent from 3.1 percent in 2023 – the outlook remains fragile, with fiscal constraints limiting government’s ability to support expansion.

Fiscal deficit was -5.2 percent of Gross Domestic Product (GDP) in 2024, slightly above the Fiscal Responsibility Act’s suspended limit of -5 percent, while public debt stood at GH¢726.7billion (US$49.4billion) or 61.8 percent of GDP, despite restructuring efforts under the Domestic Debt Exchange Programme (DDEP). The projected real GDP growth for 2025 is a modest 4 percent.

Dr. Kwakye argued that the BoG’s policy rate decision will be crucial in anchoring inflation expectations and mitigating second-round effects from rising costs in food, energy and transport.

“This decision should give a clear signal to the markets about the Committee’s commitment to dealing decisively with inflation and bringing it under control in the foreseeable future,” he stated.

The central bank’s upcoming decision comes amid calls for stronger coordination between monetary and fiscal policy.

While the BoG has borne much of the burden in stabilising the economy, persistent fiscal deficits and high government spending have complicated inflation management.

This was acknowledged by the Governor, who at the aforementioned inauguration said the apex bank would provide more consistency in its policy actions by better working in sync with the fiscal authority.

“We shall be consistent in our policy actions to avoid sending conflicting signals, as happened in the recent past; and we will work to enhance monetary policy implementation,” he said.

This was re-echoed by Dr. Kwakye thus: “This should critically entail alignment of monetary policy and fiscal policy so that the burden of economic stabilisation or stimulation, as may be required, does not disproportionately fall on either of the two policies”.