Central Banks hold firm: High interest rates to tame inflation
The latest October 2024 Africa Pulse report from the World Bank has highlighted the persistent monetary tightening across several African nations, including Ghana, as central banks aim to rein in inflation and stabilize weakening currencies.
The report underscores the challenges facing economies like Ghana, Angola, Nigeria, and Sierra Leone, where inflation remains in double digits and domestic currencies have depreciated significantly. Central banks in these countries, including the Bank of Ghana (BoG), have maintained high interest rates to anchor inflation expectations and chart a more stable course toward their inflation targets.
The report noted that central banks in countries with stubborn inflation and currency depreciation will likely sustain their tight monetary policies for an extended period. “Central banks in countries that still have double-digit inflation and weakened domestic currencies… will keep monetary policy rates higher for longer, and in fewer cases, they may increase their policy rates—particularly in countries where inflation rates still have not peaked,” the World Bank stated. The continued weakness of currencies, slow fiscal adjustments, and cost pressures are among the key factors prompting central banks to maintain higher interest rates.
Ghana, in particular, has been named among the worst-performing economies in Africa in terms of currency stability this year, alongside Ethiopia and Nigeria. The report points out that the Ghanaian cedi, like the Ethiopian birr and Nigerian naira, has continued to lose value due to high demand for foreign exchange and ongoing external pressures. Despite these challenges, the World Bank noted that some African countries may begin easing their tight monetary stance if inflationary pressures diminish and currencies stabilize. “With an improving inflation outlook and stabilizing currencies, some countries are likely to end their hiking cycle and start reducing monetary policy rates,” the report said.
However, the World Bank cautioned that persistent price stickiness and the need to firmly anchor inflation expectations could delay any reduction in benchmark rates. It added that achieving a stable path to inflation targets would require central banks to be prudent in determining when to ease monetary policy. For countries like Ghana, where inflation has been a long-standing challenge, the timing of future rate cuts will depend heavily on the inflation trajectory and currency stability.
In September 2024, the BoG took a step towards monetary easing by cutting its benchmark policy rate by 200 basis points, bringing the rate down to 27.0%. This was the second rate cut the central bank has made since 2021, marking a potential shift in its previously hawkish stance. The decision to reduce the policy rate comes amid an improving inflation outlook, although inflation remains relatively high compared to historical averages.
The Bank of Ghana’s move aligns with earlier predictions made by UK-based Fitch Solutions, which in August 2024 forecasted that the BoG would reduce its policy rate by 200 basis points before the end of the year. While Fitch’s prediction was accurate, the firm also raised concerns about the significant depreciation of the cedi and the BoG’s overall approach to monetary policy. As a result, Fitch revised its end-2024 forecast for the policy rate upward from 25.00%, citing ongoing concerns over currency depreciation and inflation. The decision to cut the policy rate is expected to offer some relief to businesses and individuals in Ghana by reducing borrowing costs and stimulating economic activity. However, the central bank remains cautious, keeping a close eye on inflation and currency dynamics to determine whether further rate cuts are feasible in the near term. Experts agree that while the current rate cuts signal a positive shift, the BoG must tread carefully to avoid reigniting inflationary pressures or further weakening the cedi.
