Bank of Ghana holds policy rate steady amid mixed inflation signals and economic optimism

The Bank of Ghana's Monetary Policy Committee (MPC) has announced the retention of its benchmark policy rate at 27 percent, signaling a cautious approach amidst ongoing economic recovery and inflationary challenges. 

This decision, revealed in the central bank's latest press release, underscores the balancing act required to sustain economic momentum while managing inflation risks.  

What is the Policy Rate?

The policy rate is the primary tool used by the Bank of Ghana to influence economic activity and control inflation. It serves as the reference interest rate for lending and borrowing across the economy, affecting the cost of credit for businesses and consumers. A higher policy rate typically aims to curb inflation by discouraging borrowing, while a lower rate encourages economic growth by making credit more affordable.

Economic growth and recovery

The Ghanaian economy continues to show resilience, buoyed by robust activity in key sectors. The real Composite Index of Economic Activity (CIEA) grew by 2.2 percent in September 2024, reversing a 0.4 percent contraction in the same period last year. Increased port activity, rising construction projects, and improved consumer demand have driven this positive trajectory.  

Business confidence is also on the rise, with October's Purchasing Managers' Index (PMI) exceeding the 50-point threshold, reflecting expanding economic activity.  

Inflation pressures persist

Inflation has edged higher in recent months, with October's rate hitting 22.1 percent, up from 20.4 percent in August. Food prices and exchange rate pass-through effects from earlier currency depreciations are the primary drivers of this uptick. 

However, core inflation, which excludes volatile items like food and energy, has shown a significant year-on-year decline, suggesting the effectiveness of monetary interventions.  

Despite this progress, the Bank of Ghana has revised its inflation outlook. The timeframe for achieving its medium-term inflation target of 6-10% has been pushed back to the fourth quarter of 2025.  

Currency gains and external sector strength

A stronger Ghana cedi, bolstered by increased foreign exchange sales and improved reserves, offers hope for price stability. The cedi appreciated by 6 percent against the dollar in November alone, recouping some of its earlier losses.  

The country’s external sector has also seen remarkable improvements, with a current account surplus of $2.2 billion in the first nine months of 2024, supported by rising gold and oil exports and robust remittance inflows. Gross reserves have risen to $7.92 billion, providing a 3.5-month import cover.  

IMF programme progress

The International Monetary Fund's Extended Credit Facility programme remains on track. Ghana is set to receive an additional $360 million in December, following a positive third review by the IMF board. This injection is expected to enhance macroeconomic stability further.  

Policy implications and outlook

Domestically, the Bank remains focused on maintaining economic stability, with a strong cedi and effective policy measures projected to align the inflation trajectory with targets over time.  

The MPC will reconvene in January 2025 to assess further developments and determine the next steps.