As Ghana grapples with inflationary pressures into 2024, the Bank of Ghana’s (BoG) Monetary Policy Committee (MPC) has employed a series of cautious yet decisive measures aimed at curbing inflation, stabilising the economy, and fostering long-term disinflation.
However, the recent inflation figures indicate that the country’s inflationary woes are far from over, with the likelihood of further rate hikes in 2025 to maintain restrictive monetary conditions and anchor inflation expectations.
Throughout 2024, the MPC’s actions reflected a cautious approach to monetary policy, underscoring its focus on balancing economic recovery with the need to manage inflation. While inflation stood at 23.2 percent at the end of 2023, it surged to 25.8 percent by March 2024 before easing to 20.4 percent by August. This moderation was driven by a combination of factors, including seasonal food price fluctuations, rising utility costs, and the effects of currency depreciation. Notably, food inflation, which had been a major contributor to price increases, saw a decline from 29.6 percent in March to 19.1 percent in August.
However, this positive trend was short-lived. The easing of inflation pressures encountered headwinds in the latter part of the year, particularly from food prices and exchange rate pass-through effects. As a result, the MPC refrained from reducing the Monetary Policy Rate (MPR) further after a 100-basis-point cut to 29 percent in January 2024. This decision was made in response to inflationary risks arising from potential increases in transport fares, utility tariffs, and the ongoing impact of currency depreciation.
In April 2024, the MPC introduced changes to the Cash Reserve Ratio (CRR) for banks, requiring them to hold between 15 percent and 25 percent of their deposits in reserve, based on their loan-to-deposit ratios. These measures were designed to curb liquidity growth and ensure that monetary policy aligned with inflation control objectives. The central bank’s liquidity management strategy had a noticeable effect on money supply growth. Broad money supply (M2+) expanded by 25.5 percent in February 2024, down from 44.9 percent a year earlier, a reflection of the BoG’s efforts to tame excess liquidity.
Despite these interventions, inflation edged upward again in the latter part of the year, with consumer inflation rising from 21.5 percent in September 2024 to 23.8 percent in December 2024, surpassing the same period in 2023. This uptick, according to analysts, raises the prospect of further tightening in early 2025. IC Securities, in its analysis, warned that Ghana’s real policy rate has softened to 3.2 percent, suggesting that further rate hikes may be necessary to restore a sufficiently restrictive monetary stance. Analysts expect the BoG to raise rates by as much as 200 basis points in January 2025 to contain demand-side pressures and sustain its disinflationary efforts.
The BoG’s continued focus on liquidity management has also affected credit growth. While nominal private sector credit (PSC) saw modest growth of 10.5 percent in September 2024, real PSC, adjusted for inflation, declined. This highlights the difficulties businesses face in accessing affordable credit, despite the central bank’s liquidity operations. The BoG’s liquidity mop-up efforts amounted to GH¢15.5 billion in December 2024, contributing to a total of GH¢149.5 billion for the year. These operations demonstrate the BoG’s commitment to macroeconomic stability, even at the cost of limiting credit availability.
Inflation has remained above the BoG’s target, raising concerns about whether further fiscal measures will be required to support the central bank’s disinflation efforts. IC Securities has suggested that complementary fiscal policies, such as a softening of the tax burden in 2025, could help alleviate price pressures and support the BoG’s efforts. With Ghana’s inflation forecast suggesting a return to the medium-term target range of 6 percent to 10 percent by the end of 2025, much will depend on the effectiveness of both monetary and fiscal policies.
The January 2025 MPC meeting will be pivotal in setting the tone for the year ahead. Analysts are closely watching for any potential rate hikes, which could shape the country’s economic trajectory in the months to come. As the BoG continues to navigate the challenges of inflation, liquidity management, and economic recovery, its ability to strike a balance between controlling inflation and supporting growth will remain critical to achieving sustainable economic stability.