In brief
- The Monetary Policy Committee (MPC) of the Bank of Ghana left the policy rate unchanged at 27.0% at its first MPC meeting in 2025, despite significantly overshooting its inflation target for end-2024. With the IMF mission expected in Accra from 10th – 14th February to align Ghana’s FY2025 budget with the ongoing reforms programme, the MPC opted to lean on the expected fiscal tailwind for disinflation as against stirring market uncertainty with a rate hike.
- The FY2025 budget takes on more significance as the MPC leans on fiscal tightening to revive disinflation. We fully align with the Bank of Ghana’s position on fiscal tailwind to drive down inflation in the months ahead as renewed fiscal tightening will curb the demand pressures without further policy rate hike. Additionally, we expect the proposed tax reforms to ease the multiple price build-up, especially in the VAT regime, to quicken the pace of disinflation in 2H2025.
- Forex market operation ostensibly triggered to avert rate hike. After suspending its recent aggressive FX Forward sale on 20 December 2024, we had ruled-out the return of FX sale on a similar scale in 1Q2025 with authorities mindful of IMF reserve accumulation target for 2025 (+USD 1.5bn). However, the Bank of Ghana surprised the market last week, selling a total of USD 320.0mn in 7-day FX forwards to cap the renewed forex pressure as the MPC meeting was underway. Given the inflation overshooting last year and the consequence for the IMF Monetary Policy Consultation Clause, we think the MPC chose to deploy FX sale as a stopgap measure to mitigate the risk of rate hike ahead of the budget statement in late-1Q2025.
- External account position showing rapid improvement on favourable trade balance and gold-for-reserves. Consequently, the gross forex reserves improved remarkably to ≃USD 9.0bn (4.0 months of import cover) while the net forex reserves stood at USD 6.4bn (2.9 months cover) at FY2024. We estimate that the steady improvement in net international reserves (NIR) puts the authorities about 16-months ahead of the target to restore NIR to at least 3.0-months import cover by end of the IMF programme. This bodes well for the FX outlook as the authorities continue the gold-for-reserves programme with a tighter fiscal regime in 2025.
Downloads
Download Full Report