In brief
- The Monetary Policy Committee (MPC) of the Bank of Ghana delivered a 50bps hike in the Monetary policy Rate (MPR) to 30.0% at its July 2023 MPC meeting. The MPC cited a potential 2nd round effect of the recent food price shocks as an elevated risk to the inflation outlook, which required decisive fiscal and monetary tightening to avert.
- Encouragingly, the Committee allayed our fears that the recent inflation upturn may have deviated from the target band as the MPC noted that inflation as of June 2023 was within the target band under the IMF Monetary Policy Consultation Clause.
- However, upside risks abound as the MPC’s baseline forecasts show a slightly higher elevated profile in the year ahead. This could become embedded in underlying inflationary pressures, if not contained with further policy tweaks. Essentially, the inflation monster has only been dazed by ongoing fiscal and monetary tightening but will not be finished off without further policy tightening.
- The scars from the DDEP are visible but ongoing recovery in profits is soothing for the banking sector. We view the strong rebound in banking sector profitability as positive in the medium-term amidst the existing suspension of dividend payments, which will aid the retention of profits and rebuild of capital buffers faster.
- Fiscal execution in the first 5-months of 2023 revealed ongoing adjustments in line with the IMF programme target and indicates a steady moderation in the fiscal risk, albeit still elevated. While we are confident of continued FX stability in 2H2023, we note that the supporting anchors are delicate in the immediate term as Net International Reserves (NIR) remain low ahead of the expected annual cocoa loan syndication. In our view, this will sustain the tight monetary stance in the near-term, pending moderations in inflation and fiscal risk.
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