The fourth consecutive drop in headline inflation of the country has raised hopes for a possible reduction in the Monetary Policy Rate in September.
Ghana’s year-on-year inflation has been on a downward trajectory for the last four months. The rate in the first half of 2024 peaked in March at 25.8%. The subsequent months saw a continuous decline. Dropping to 25% in April, the rate further significantly declined to 23.1% in May.
The downward trend continued in June with a rate of 22.9% and was further sustained with the latest rate in July which recorded 20.9%.
The continuous decline has raised hopes that the Bank of Ghana may possibly achieve its inflation target band of 13% -17% for 2024.
Given the inflation-targeting regime operated by the Bank of Ghana where the policy rate is used as a tool to control inflation, the Monetary Policy Committee (MPC) for 7consecutive months has held the policy rate at 29.0%.
The policy rate has been held at 29% for this long period to help mop up excess monies in the system in order to reduce inflation which has been relatively high over the period.
With the current development of continuous decline in inflation, Development Economist at the University of Ghana, Dr. George Domfeh is optimistic about a possible policy rate cut in the next MPC meeting.
He tells The High Street Journal that his optimism is largely dependent on the inflation rate for August. Dr. Domfeh believes if the downward of inflation continues in August, the policy rate is likely to be reduced in September when the MPC will hold its next meeting.
“Looking at what is happening, if by at the end of August, inflation comes down, my expectation is that the next meeting of the Monetary Policy Committee, the policy rate will drop from the 29% that has been maintained for so long. That’s for the first time in many months, we will see policy rate dropping,” the economist explained.
He further noted that a policy rate cut would be good news for the economy. He explains that a cut will translate into a reduction in interest rate which will possibly propel business expansion, and encourage investments.
He explained that, “when the policy rate drops, it is very good. It will also encourage more people who otherwise would have also stayed idle to take money to expand their businesses or start new businesses. So when policy rate comes down, it encourages production and creates jobs.”
This prediction by the Economists after an earlier prediction by the credit ratings agency, Fitch Solutions. Fitch early this month predicted the Bank of Ghana is likely to reduce its benchmark policy rate by 200 basis points (bps) before the close of 2024.
However, while Dr. Domfeh believes the cut is expected in the next meeting in September, Fitch believes the rate will remain unchanged in September indicating that the cut is likely to happen in November before the year closes.
