The war in the Middle East between the United States, Israel, and Iran continues to threaten global economies through global energy markets, and the impact could soon be felt in Ghana’s monetary policy decisions.
It is highly anticipated that the war in the Gulf Region will take center stage in the discussions of the next Monetary Policy Committee (MPC) scheduled for next week.
Even ahead of the crucial meeting, it is already feared that the surge in global crude oil prices could disrupt Ghana’s ongoing disinflation path and potentially force the Bank of Ghana to pause its recent easing of interest rates when the MPC meets next week.
Oil Prices Jump, Inflation Risks Return
Since the beginning of the war, a little over a week ago, international benchmark oil prices have climbed sharply in recent weeks and are now more than 50% higher than they were during the last fuel pricing window.
Prior to the beginning of the war, for months, Ghana’s inflation outlook had been improving. One key factor was the transportation component of the Consumer Price Index, which had remained in deflation territory, helping moderate overall inflation.
But the new surge in oil prices on the international market threatens to reverse that trend. As has always been experienced, higher fuel costs typically translate into increased transport fares, higher food distribution costs, rising production and logistics expenses, among others.
These price pressures often ripple through several sectors of the economy, pushing inflation upward again. This is the situation the MPC is faced with.
This means that there is a need to create a difficult balancing act.
A Possible Pause in Rate Cuts
The central bank had begun cautiously easing monetary conditions after inflation showed sustained moderation.
With oil prices now breaking bounds, putting inflation, which has been tamed, at risk of a reversal. This delicate situation complicates the trajectory of the monetary policy rate easing.
This means that if fuel costs begin to threaten consumer prices again, the Bank of Ghana will have no option but to decide to hold the policy rate steady or raise the rate rather than continue easing, in order to prevent inflation expectations from rising.
In practical terms, this would mean borrowing costs for businesses and households may remain elevated for longer than previously expected.
Pressure on the Cedi
The risks extend beyond inflation as the cedi is also expected to endure its fair share of the Middle East crisis.
Think tank C-NERGY Global Holdings has also warned that the Middle East crisis could place additional pressure on the Ghanaian cedi. It explains that Ghana remains heavily dependent on imported refined petroleum products. When global oil prices rise sharply, the country’s fuel import bill increases.
That means more dollars are needed to pay for energy imports, which in turn increases demand for foreign exchange.
Higher dollar demand can weaken the cedi if inflows do not rise at the same pace.
What to Watch Next Week
For the global development and its impact on the domestic economy, attention is now on the Bank of Ghana’s Monetary Policy Committee meeting.
While the central bank had been expected to continue gradually lowering interest rates as inflation fell, the latest global developments may prompt policymakers to adopt a more cautious stance.
Maybe or maybe not, the expectation of the business community and households for another policy rate cut may suffer a setback. This is because a conflict thousands of kilometres away may end up shaping Ghana’s monetary policy decision due to the country’s overexposure to global shocks.
