• Ghana Surprises With Africa’s First Rate Cut of 2024
• Monetary policy committee lowers key rate to 29% from 30%
• Inflation expected to ease to around 13% to 17% by year-end

The Bank of Ghana has implemented its first cut to the benchmark interest rate since 2021, aligning with its expectation of a continued slowdown in inflation while aiming to support economic growth. On Monday, the monetary policy committee reduced the key rate from 30% to 29%, marking the end of a pause that had been in effect since September. This move was anticipated by only three out of 10 economists surveyed by Bloomberg, with the majority expecting rates to remain unchanged.

In December, annual inflation eased to a 21-month low of 23.2%, down from the previous month's 26.4%. This adjustment stands out as the initial rate cut by an African central bank in the current year. Following the announcement, the nation's currency, the cedi, depreciated by 0.5% to 12.3361 by 12:28 p.m. in Accra. Concurrently, Ghana's dollar bonds maturing in 2032 experienced a 0.25 cent increase to 43.83 cents on the dollar.

Governor Addison explained that a more significant rate reduction was avoided due to lingering concerns, stating, "We have not totally gotten out of the woods. So inflation is still high," echoing sentiments expressed by the International Monetary Fund (IMF). The IMF, which recently approved a second tranche of $600 million for Ghana under a three-year bailout program, recommended maintaining a "sufficiently high monetary policy stance" to counter inflationary pressures.

While acknowledging the challenges posed by inflation, Addison highlighted policymakers' awareness of the economy operating below its potential. He emphasized the dual objectives of adhering to the core mandate of reducing inflation and concurrently providing incentives for economic growth.

Ghana, the world's second-largest cocoa producer, sought an IMF bailout in July 2022, subsequently gaining approval for a $3 billion program nearly a year later. The country is actively restructuring its $47 billion debt to ensure sustainability within the IMF program. With an in-principle agreement with bilateral creditors in place, Ghana anticipates reaching an agreement with eurobond holders by the end of March.

FX MARKETS

Traders anticipate a strengthening of Ghana's currency against the dollar in the upcoming weeks, while the Nigerian naira and Kenyan shilling are expected to weaken. Meanwhile, Uganda's shilling is projected to remain stable, according to market reports.

On the 19^th Jan, the IMF Executive Board concluded the 2023 Article IV consultation and the initial review of Ghana's 36-month Extended Credit Facility arrangement. The approval of the first review paves the way for the immediate disbursement of SDR 451.4 million (approximately US$600 million).

The efforts of the authorities are yielding positive results, evident in the emerging signs of economic stabilization. The year 2023 has demonstrated resilient growth, accompanied by a decline in inflation, and notable improvements in both fiscal and external positions. Additionally, progress is underway in debt restructuring, with the completion of a domestic debt exchange during the summer and a recent agreement on the restructuring of official bilateral debt.

EUR/GHS remains volatile, but has somewhat gathered some support entering February.

The European STOXX 50 achieved a new peak in 23 years, and the broader STOXX 600 reached a two-year high. Investors closely examined the Eurozone's Q4 GDP flash data and its potential impact on the ECB's policy outlook. Preliminary figures revealed that the Eurozone economy unexpectedly avoided a technical recession in the last quarter of 2023, following a 0.1% contraction in Q3. This positive outcome was attributed to better-than-expected growth in Spain and Italy, which offset the stalling French economy and a 0.3% contraction in Germany.

Last week, ECB President Lagarde emphasized that risks to economic growth were "tilted to the downside." Recent indicators, such as the Ifo and GfK Consumer Indicators worsening unexpectedly in January and the Eurozone economic sentiment indicator marginally weakening from December's 7-month highs, raised concerns. Additionally, the IMF downgraded its growth prospects for the Euro Area for 2024 to 0.9% from 1.2%. This prompts questions about the ECB's future actions. As long as the Eurozone remains in a de facto stagnation mode and avoids a severe recession, the ECB is unlikely to respond to slower growth with immediate rate cuts. The central bank should refrain from considering rate cuts until the task of returning inflation to the target is accomplished. Only a severe recession or a significant drop in longer-term inflation forecasts below 2% would prompt a rate cut before the summer months.

In response to the slightly better-than-expected GDP print, the euro gained an average of 0.17% against most G10 peers, except the Swedish Krona. EUR/SEK declined for the 8th consecutive day as improving growth prospects continued to favor the Scandinavian currency. Meanwhile, EUR/USD traded mostly sideways, registering a modest gain of 0.1%, as traders adopted a cautious stance while awaiting the Fed's monetary policy decision later today. EUR/GBP saw a 0.2% daily gain but remained close to 5-month lows as the BoE rate decision looms tomorrow afternoon.

The week began with the British pound experiencing some softness against the US dollar, slipping back into the $1.26 range due to increased geopolitical tensions that spurred safe-haven flows. Currently, the pound is struggling to maintain a monthly gain against the dollar, following a cumulative increase of approximately seven cents over the preceding two months.

Despite the heightened tensions in the Middle East, foreign exchange markets have remained relatively calm, and the pound, sensitive to risk, has held up well. This resilience can be attributed to investors scaling back their expectations of monetary easing by the Bank of England (BoE), driven by stronger inflation and positive PMI data this month. The current market sentiment implies around 100 basis points (equivalent to four 25bp rate cuts) for 2024, which is 30-40 basis points less than the projections for the Federal Reserve (Fed) and the European Central Bank (ECB). These optimistic market expectations have contributed to pushing GBP/EUR to levels above €1.17, reaching fresh 5-month highs yesterday. Taking a broader perspective, both GBP/USD and GBP/EUR are trading approximately two cents higher than their 12-month averages of $1.2475 and €1.1519, respectively.

However, we perceive near-term downside risks for the British pound, though these movements seem to be contained, as indicated by low implied volatilities. The upcoming BoE meeting on Thursday could serve as a catalyst if the UK central bank disappoints markets by abandoning its tightening bias and adopting a more dovish stance, evident through the vote split and the accompanying statement.

Last week, central banks in Japan, Canada, and the Eurozone opted to maintain their policy rates, marking a subdued start to the monetary policy year. The focus now shifts to the Federal Reserve and the Bank of England, scheduled for Wednesday and Thursday, respectively. Although no immediate policy changes are anticipated, investors will closely analyse comments and press conferences to discern the sentiment of policymakers. These seemingly uneventful meetings this week will serve as crucial steppingstones leading up to the forthcoming rate decisions.

Globally, expectations for policy easing have diminished, with the most notable reduction in anticipated cuts observed for the Bank of England (BoE). Projections indicate a 30-40 basis points lower reduction by the BoE compared to the Federal Reserve (Fed) and the European Central Bank (ECB) this year. GBP has been anchored around $1.27 against the USD for six consecutive weeks, displaying no signs of a breakout. In contrast, GBP/EUR has surpassed €1.17 for the first time since September, marking its fifth consecutive weekly appreciation. GBP’s strength is attributed to stronger-than-expected Consumer Price Index (CPI) and Purchasing Managers' Index (PMI) figures, overshadowing weaker metrics such as consumer confidence and retail sales. The ongoing trade of GBP/USD around the $1.27 level suggests a lack of directional movement. GBP/EUR's ascent above €1.17 is supported by weak Eurozone data and a somewhat dovish stance from the ECB. However, the current risk is tilted towards the downside, as the Bank of England is not anticipated to align with the hawkish expectations on Thursday.

Policy makers are expected to maintain the benchmark rate at 5.25%, aligning with the consensus forecast. Nevertheless, the possibility of a downward revision in the central bank's inflation forecast poses a risk to GBP. Despite a gradual decline in wage growth, it remains sufficiently high to justify keeping rates steady at least through the first quarter. Both the services and manufacturing PMIs expanded last month, indicating that the British economy is holding up somewhat better than initially anticipated.