First Impressions: Ghana MPC hikes MPR by 250bps to 24.5% – IC | Africa-focused full-service investment bank

Ghana’s Monetary Policy Committee (MPC) hiked its Monetary Policy Rate (MPR) by 250bps to 24.5% today.
The MPC also continued its gradual upward adjustment to the Cash Reserve Ratio (CRR) which went up by another 100bps to 14.0%. The final 100bps increase to 15.0% is expected in November 2022.

With inflation still soaring after hiking rates from 13.5% to 24.5% in less than a year, we are concerned about the effectiveness of the central bank’s hawkish stance.
In our opinion, the weak transmission mechanism is not only as a result of the supply-side and cost-push drivers of inflation but largely due to the continuous financing of the budget deficit by the central bank.
We are of the view that the monetization of the budget deficit is injecting too much liquidity, driving inflationary pressures and undermining the effectiveness of the policy rate hikes.
In addition, the 2022 budget execution continues to face headwinds from revenue underperformance, which turned out c.14% below the GH¢60.1bn target for the period, although expenditure was contained within budget.
Consequently, we observed that the fiscal risk continues to mount as the Treasury recorded a wider deficit equivalent to 6.4% of GDP in the first 9-months of 2022 compared to the period target of 5.0%.

Given the wider-than-expected budget deficit of 6.4% of GDP in the first 9-months of the year, we perceive a high risk of fiscal overrun beyond the authorities’ revised target of 6.6% for FY2022.
While revenue performance could improve slightly in 4Q2022 with the belated rollout of new measures, we remain unconvinced that the potential yield would offset the 9-months shortfall.
Market conditions could remain tight with elusive bids for local currency bonds despite higher yields
With the latest indication of fiscal overruns amidst the heightened risk of debt distress, we believe investors would deepen the flight-to-safety strategy with significant caution around bids for local currency bonds despite the attractive valuations.