BoG Opts for Steady Rates While Inflation Continues to Fall

The Monetary Policy Committee (MPC) of the Bank of Ghana is set to make a crucial decision on the country’s benchmark interest rate at its 124th meeting. In a cautious approach, the committee is expected to hold steady at 28 per cent, opting for prudence over hasty rate cuts.

According to GCB Capital’s Economic and Market Insight analysis, this measured stance will allow the MPC to closely monitor the economy’s progress, particularly with headline inflation currently below 20 per cent.

As the economic landscape continues to evolve, the MPC may signal a potential gradual rate reduction by the third quarter of 2025, contingent on sustained disinflation trends, currency stability, and fiscal discipline.

A rate cut in Q3 2025 could provide a much-needed boost to the economy, but it hinges on the Bank of Ghana’s ability to maintain a delicate balance between growth and inflation control. With fiscal policy and foreign exchange markets playing a critical role, the MPC’s decision will be closely watched by stakeholders and market analysts alike.

However, potential upside risks such as rising fuel prices, depreciation of the cedi or trade tensions could postpone any easing. Conversely, a more rapid disinflation could accelerate this timeline.

Nonetheless, if a rate-cutting cycle does occur, nominal interest rates are likely to decline, which would lower borrowing costs and potentially stimulate economic activity.

However, caution is warranted as any premature easing of policy could trigger a resurgence of inflation, jeopardising the recent progress in price stability.

Headline inflation

Headline inflation has been steadily declining since its peak, with the April figure of 21.2 per cent indicating progress, yet it remains significantly above the central bank’s target range of 8±2 per cent.

The current policy rate of 28 per cent continues to exceed inflation, demonstrating the Monetary Policy Committee’s (MPC) commitment to anchoring expectations.

However, with the real policy rate of 28 per cent compared to the 21.2 per cent inflation has reduced the urgency for further tightening.

The continued decline in inflation to 21.2 per cent, the fourth consecutive monthly drop, signals a gradual easing of inflationary pressures.

However, with the Monetary Policy Rate (MPR) elevated at 28 per cent, the policy stance remains tight to anchor inflation expectations.

Treasury yields, currently ranging between 15.23 per cent and 16.95 per cent (Tender 1953), remain deeply negative in real terms, creating disincentives for holding government securities.

Fiscal consolidation efforts have further motivated the Ministry of Finance to suppress borrowing costs, resulting in limited upside for treasury yields despite the high policy rate.

In the fixed income market, the low real returns on government securities continue to dampen investor appetite.

As Ghana lacks inflation-indexed bonds, investors are increasingly shifting towards higher-yielding corporate debt, bank securities and short- to medium-term assets that provide better liquidity and potential for reinvestment at higher rates if inflation moderates further.

The equity market presents selective opportunities as macroeconomic stabilisation improves investor sentiment.

Banking stocks continue to perform well, benefiting from improved net interest margins and lower impairments, while other listed sectors such as agriculture, manufacturing, and telecoms stand to gain from easing cost pressures and a stabilising cedi.

Ghana cedi

On the currency front, the cedi has shown strong performance, emerging as the best-performing currency globally in May.

This appreciation is supported by a disciplined fiscal outlook, investor confidence and structural measures, including the newly passed Act establishing GOLDBOD and foreign exchange initiatives by the Bank of Ghana.

These interventions are expected to provide short- to medium-term stability to the currency and ease demand-side pressures on foreign exchange markets.

In the commodities space, price stability in locally produced foods and non-food baskets and agricultural imports may continue as global commodity markets adjust, and local currency strength reduces pass-through effects.

However, external shocks, trade tensions and global supply chain risks still present a level of unpredictability that investors must factor into their outlook.

Given the current macro and market dynamics, investors should consider repositioning toward short to medium-duration fixed income instruments, high-quality corporate bonds and equities with strong fundamentals in sectors benefiting from disinflation and exchange rate stability.

Holding moderate commodity exposure, particularly to gold, may provide a hedge against volatility. Meanwhile, given the cedi’s strengthening trajectory and policy support, dollar hoarding may be reduced in appeal, but maintaining a balanced exposure to foreign currency assets could still serve as insurance against future shocks

Source: Graphic online