The Bank of Ghana ( BOG) announced on Monday, January 29, 2024, that it will lower the policy rate by 100 basis points.

The decision was made in light of growing inflationary risks.

Ghana Commercial Bank (GCB) Capital explains that the Monetary Policy Committee (MPC) decided on a cautious position because of variables that are aiding in the disinflation process, including favourable crude oil prices, a tight policy stance, and relative cedi stability.

This is in spite of the possibility of a deeper reduction.

The Monetary Policy Committee (MPC) anticipates headline inflation to ease to 15%±2% by the end of 2024 and gradually return to the medium-term target range of 8%±2% by 2025.

GCB Capital comments that the cut seems conservative, with the MPC relying on a commitment to maintaining a tight monetary policy stance and strict implementation of the 2024 fiscal budget to sustain the inflationary outlook.

While acknowledging the ongoing disinflation process, GCB Capital agrees with the MPC's medium-term outlook despite emerging upside risks.

The firm expects the disinflation to persist but at a slower pace, potentially experiencing a shift in March 2024 due to unfavourable base drifts before resuming the downward trend from April 2024.

GCB Capital also notes that, despite economic indicators showing signs of continuous recovery, the Gross Domestic Product (GDP) growth remains below trend and necessitates stimulus.

The policy rate cut is seen as unsurprising, and GCB Capital anticipates the MPC will uphold a suitably tight policy stance to support the disinflationary process.

See statement below:

The rate cut could have been deeper, but for the emerging upside risks to inflation: The committee noted the several factors anchoring the disinflation process, including the tight policy stance, relative cedi stability, and favourable crude oil prices, among others, and the committee expect the disinflation process to continue despite the emerging upside risks to the inflation outlook”, it revealed in it Economic Update and Market Insight.

The MPC cut the policy rate by 100 basis points to 29% on Monday January 29, 2024. It expects headline inflation to ease to 15%±2% by the end of 2024 and gradually trend back to within the medium-term target range of 8%±2% by 2025.

GCB Capital said “Thus, the 100% cut appears to be a conservative action, given the upside risks to inflation, with the MPC counting on its commitment to maintain an appropriately tight monetary policy stance and a strict implementation of the 2024 fiscal budget to sustain the inflationary outlook”.

Disinflation process to continue but at slower pace

It continued that the disinflation process will continue but at a slower pace

“We agree with the MPC that the disinflation process is on course, and we are broadly aligned on the medium-term outlook for inflation despite the emerging upside risks. We expect the disinflation process to continue but at a slower pace, potentially changing course in March 2024 due to unfavourable base drifts before resuming the downward trend from April 2024”.

Again, it said though the 2.8% average growth outturn over nine months of 2023 is ahead of target and the leading indicators of economic activity are showing signs of continuous recovery, Gross Domestic Product growth is still below trend and requires stimulus; hence, the unsurprising cut in the policy rate.

However, it expects the MPC to maintain an appropriately tight policy stance to sustain the disinflationary process.