Fed rate cut could ease pressure on ailing Cedi – IEA
By Daniel NONOR, Accra
THE Institute of Economic Affairs (IEA) has forecasted potential relief for the country’s struggling currency, in its economic outlook for July to August 2024.
The IEA, however, warns that “long-term cedi stability requires addressing Ghana’s underlying structural weaknesses that put pressure on the currency”.
The IEA’s projections are on the backdrop of recent signals from the U.S. Federal Reserve (Fed) indicating possible interest rate cuts, which could ease the downward pressure on the cedi by slowing capital outflows from emerging markets like Ghana.
In its July meeting, the Fed decided to maintain interest rates at 5.25-5.50% but suggested the possibility of three rate cuts by the end of 2024.
The IEA projected that lower interest rates in the U.S. could weaken the dollar, making debt repayments more manageable for emerging economies and encouraging capital inflows as investors seek higher returns elsewhere.
For Ghana, it said this could offer much-needed respite for the cedi to rebound. The cedi has depreciated by 22% against the dollar since the beginning of 2024, continuing a trend of significant declines from 2022 and 2023.
This depreciation is driven by strong demand for foreign exchange for imports such as petroleum products and pharmaceuticals, compounded by Ghana’s exclusion from international capital markets and lower-than-expected inflows from cocoa syndicated loans.
In its March 2024 Summary of Economic and Financial Data, the Central Bank pegged the cedi at GHS 12.74 to $1, marking a year-to-date depreciation rate of 6.8%.
The depreciation rates for the cedi against the dollar for January, February, and March were 1.3%, 4.7%, and 6.8%, respectively.
The outlook also provided a broader view of the country’s ongoing economic challenges stating that despite a recent decrease in inflation from 54.1% at the end of 2022 to 20.9% in July 2024, inflation remains significantly above the Bank of Ghana’s target range of 6-10%.
The report further stated that food inflation continues to drive overall inflation, with high prices for fuel, utilities, and transport fares persisting.
The Monetary Policy Committee (MPC) of the Bank of Ghana has maintained the Policy Rate (PR) at 29% since July, despite the decline in inflation. The IEA argues that the PR, one of the highest in Sub-Saharan Africa, remains artificially elevated. The IEA states that given the inflation decrease, a cut of at least 200 basis points would be justified, however, the IEA expects the MPC to reduce the rate by no more than 100 basis points due to constraints under Ghana’s IMF programme.
