6 October 2022

First Impressions: Ghana MPC hikes MPR by 250bps to 24.5%

What happened?

  • Ghana’s Monetary Policy Committee (MPC) hiked its Monetary Policy Rate (MPR) by 250bps to 24.5% today.
  • The MPC also continued its gradual upward adjustment to the Cash Reserve Ratio (CRR) which went up by another 100bps to 14.0%. The final 100bps increase to 15.0% is expected in November 2022.

Our opinion

  • With inflation still soaring after hiking rates from 13.5% to 24.5% in less than a year, we are concerned about the effectiveness of the central bank’s hawkish stance.
  • In our opinion, the weak transmission mechanism is not only as a result of the supply-side and cost-push drivers of inflation but largely due to the continuous financing of the budget deficit by the central bank.
  • We are of the view that the monetization of the budget deficit is injecting too much liquidity, driving inflationary pressures and undermining the effectiveness of the policy rate hikes.
  • In addition, the 2022 budget execution continues to face headwinds from revenue underperformance, which turned out c.14% below the GH¢60.1bn target for the period, although expenditure was contained within budget.
  • Consequently, we observed that the fiscal risk continues to mount as the Treasury recorded a wider deficit equivalent to 6.4% of GDP in the first 9-months of 2022 compared to the period target of 5.0%.

What’s next?

  • Given the wider-than-expected budget deficit of 6.4% of GDP in the first 9-months of the year, we perceive a high risk of fiscal overrun beyond the authorities’ revised target of 6.6% for FY2022.
  • While revenue performance could improve slightly in 4Q2022 with the belated rollout of new measures, we remain unconvinced that the potential yield would offset the 9-months shortfall.
  • Market conditions could remain tight with elusive bids for local currency bonds despite higher yields
  • With the latest indication of fiscal overruns amidst the heightened risk of debt distress, we believe investors would deepen the flight-to-safety strategy with significant caution around bids for local currency bonds despite the attractive valuations.