As Ukraine-Russia war rages on and global growth dips, Bank of Ghana increases policy rate to 17%

The Bank of Ghana has raised the policy rate 250 basis points from 14.5 per cent to 17 per cent, because the global economy has been reeling under the impact of the COVID-19 pandemic and the ongoing Ukraine-Russia war are putting pressure on the global economy and challenging growth efforts.

According to the Bank of Ghana, the global environment has changed dramatically since its January 2022 Monetary Policy Meeting (MPC), reflecting new geopolitical events that have “further heightened uncertainties. In particular, the Russia-Ukraine war has further challenged global growth efforts,” it says.

The Bank further states that global growth currently faces downside risks including the effect of the Russia-Ukraine war on commodity prices, addition of more strain to supply chain bottlenecks on manufacturing output, withdrawal of monetary policy stimulus in some major advanced economies, and vulnerabilities associated with rising debt stocks especially in emerging market and developing economies.

Citing the updated World Economic Outlook report by the IMF that projects a decline in global growth from 5.9 per cent in 2021 to 4.4 per cent in 2022, it says, this growth downgrade excludes recent developments of the Russia-Ukraine war hence, further moderation of projected global growth estimates is likely, under prolonged conditions of the war.

The Bank of Ghana notes further that the elevated global price pressures have persisted driven by sharp increases in food and crude oil prices, and supply chain disruptions. The Russian-Ukraine war has exacerbated these price pressures, and pushed energy and commodity prices to record high levels. As a result, headline inflation across several Advanced and Emerging Market economies has moved above targets, prompting monetary policy responses to help prevent inflation from becoming embedded.

It indicated that the US Federal Reserve Bank, has, for the first time since 2018, raised its policy rate by 25 basis points to 0.50 per cent, with further guidance that it would step up its incremental policy rate adjustment by 0.50 per cent if inflation becomes endemic.

The Bank indicates that on the domestic front, the rebound in economic activity continued, as reflected in some improvements in the Bank’s updated Composite Index of Economic Activity (CIEA), although at a slower pace than in 2021.

“The index recorded an annual growth of 4.2 per cent in January 2022 compared to 13.9 and 3.4 per cent in the corresponding periods of 2021 and 2020. The key drivers of the index during the period were industrial production, exports, credit to the private sector and air-passenger arrivals. Consumption of goods and services, and construction activity, however, slowed down, acting as a drag on the index,” it said.
The Bank however, acknowledges that, among other things, notwithstanding the sustained growth momentum, rising food prices, upward adjustments in petroleum prices and its effect on transport fares, and exchange rate depreciation pass-through have pushed up inflation to 15.7 per cent at the end of February 2022, 5.7 percentage points outside the medium-term target band.

“Food inflation jumped sharply from 12.8 per cent in December 2021 to 17.4 per cent in February 2022, while non-food inflation jumped from 12.5 per cent to 14.5 percent over the same period.

Also, underlying inflationary pressures have increased, signalling broad-based price pressures. The Bank’s core inflation measure (defined to exclude energy and utility prices), increased from 11.8 per cent in December 2021 to 13.6 per cent in January 2022 and further up to 15.4 per cent in February 2022. Similarly, weighted inflation expectations comprising consumers, businesses, and financial sector,
also picked up significantly over the period,” it added.

By Emmanuel K. Dogbevi

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