"Key MPC Meeting Kicks Off Today – Policy Rate Set to Be the Main Focus"

The Monetary Policy Committee (MPC) of the Bank of Ghana will convene its first meeting of the year today, where it will assess both global and domestic economic conditions and decide on the most appropriate monetary policy stance moving forward.

At present, the policy rate stands at 27%, with inflation at 23.8% at the close of 2024, which is well above both the government’s target of 15% and the Bank of Ghana’s target of 18%. As such, discussions at this MPC meeting are expected to focus primarily on the direction of the benchmark interest rate. During its final meeting of 2024, the Bank of Ghana explained its decision to maintain the policy rate at 27% by pointing to projections indicating that inflation would remain elevated due to a number of factors. These included the volatile nature of food prices, the impact of past exchange rate fluctuations, rising fuel prices, and adjustments in utility tariffs.

The Bank observed that food prices had seen significant increases in the period under review, compounded by a sharp depreciation of the local currency earlier in the year. These combined factors disrupted the disinflation process, preventing inflation from falling as expected. Additionally, at the September 2024 MPC meeting, inflation projections for the following year had been revised upward, with the forecast for average inflation rising from 19% to 20.1%. As a result, the timeframe for bringing inflation back within the target band of 6-10% was pushed back from Q3 2025 to Q4 2025.

In the near term, the Bank of Ghana noted that strengthening the currency could support future price stability, and therefore, maintaining the policy rate at 27% would be necessary to achieve this outcome. However, the economic challenges that led to the Bank’s decision to hold the policy rate steady at the end of 2024 have persisted, or in some cases, worsened. Inflation, for example, has increased slightly from 23% in November 2024 to 23.8% in December 2024, driven primarily by the continued rise in food prices.

The cost of crude oil on the international market has also climbed, leading to an increase in fuel prices at local pumps. Meanwhile, utility tariffs have been adjusted upward, with further increases anticipated in the near future. While the depreciation of the local currency, which had contributed to higher inflation, has slowed somewhat since January, uncertainty surrounding the stability of the currency remains a significant concern.

Given these ongoing challenges, many analysts believe that the Bank of Ghana might consider a modest increase in the policy rate to further combat inflation and ensure that it falls within the target range. However, insiders suggest that the MPC is likely to be influenced by the new government’s economic policies under the leadership of President Mahama. The Mahama administration has promised to foster a more business-friendly environment, with a particular focus on reducing borrowing costs for the private sector in order to stimulate business growth and create jobs.

Business leaders and industry groups have long advocated for a reduction in the policy rate, arguing that lower interest rates would ease the burden on businesses by reducing borrowing costs. The current lending rate of 27.4%, effective from January 10, 2025, has had a negative impact on many businesses, particularly in sectors that rely on credit to expand and invest. Kwamina Asomaning, the CEO of Stanbic Bank, recently voiced concerns about how the current interest rate regime is harming businesses and hindering economic growth.

There is also speculation that the newly appointed Finance Minister, Cassiel Ato Forson, may engage in discussions with the Governor of the Bank of Ghana, Dr. Ernest Addison, to align fiscal and monetary policies in a way that supports a more stable business environment in the country. Such a conversation could potentially lead to a reduction in the policy rate if the government seeks to signal its commitment to improving conditions for businesses.

Market analysts predict that, at the conclusion of the meeting, the Bank of Ghana may reduce the policy rate by anywhere from 50 to 200 basis points. This move would be seen as a sign of the government’s intent to create a more favorable environment for businesses and demonstrate its commitment to fostering economic growth. However, it remains to be seen whether the Bank of Ghana will prioritize inflation control or adopt a more accommodative stance to support business activity. The decision could have significant implications for the country’s economy and its ongoing efforts to stabilize the macroeconomic environment.