The Monetary Policy Committee (MPC) of the central bank is set to announce a new Monetary Policy Rate (MPR), on Monday March 27, 2017, with the prime objective of ensuring price stability and low inflation to ensure stable currency and support output and employment growth. Groupe Nduom (GN) Research expect the Bank of Ghana to reduce the monetary policy rate (MPR) by 100 basis point to 24.5% given the falling inflation trend, the somewhat stabilization of the Cedi and the need to consolidate government fiscal policy.
This will be the 75th regular meeting of the MPC since the BOG’s introduction of the policy rate as a central policy tool for its inflation targeting regime in 2002. Between 2002 and 2003, the policy rate peaked at 27.5% in May 2003 before declining to 12.5% in August 2007. After this period it increased to 18.5% in September 2009 and decreased to 12.5% again in November 2011. For the past five years, it peaked at 26% in 2016, where it remained unchanged for the greater part of the year until November where it was reduced by 50 basis point to 25.5%.
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At the last MPC meeting, the MPC upheld the Monetary Policy Rate (MPR) at 25.5%, amid calls by the business community for a lower rate because of the negative effects of the high rate on the domestic economy. The MPC noted that, though headline and core inflation have been declining coupled with a strong external sector performance, concerns about positive inflation outlook due to pass-through effect of the cedi depreciation resulted in balanced inflation risks and growth, hence the decision to maintain the policy rate at 25.5%.
Since the last MPC meeting in January, many things have happened on both the domestic and the global fronts. At the global level, commodity prices have increased marginally providing a better outlook for emerging markets. The outlook for countries such as China and Brazil have improved signalling a better economic recovery. However, the uncertainty in the Euro zone due to Brexit and the UK’s negotiation with European leaders must be a cause of worry for developing countries including Ghana.
On the domestic front, inflation continue to fall, declining from 17.2% in September 2016 to 13.2% in February 2017. This is partly due to the IMF’s Extended Credit Facility Agreement which requires the Bank of Ghana to have a tighter monetary policy stance. This led to a fall in the growth rate of total liquidity to 20.53% at the end of third quarter of 2016 as against 25.57% recorded in the same period of 2015. Though inflation has been declining, achieving the medium term target 8% plus or minus 2% is key in the determination of the monetary policy rate.
The Cedi depreciated in January on average by 0.14%, 0.18%, 0.08% and 0.21%, 0.16% and 0.24% in February against the British Pound, Euro and the US dollar respectively. As at Tuesday 21st March, 2017, the Cedi recorded a year to date depreciation of 7.83%, 9.48 and 7.01% against the British Pound, the Euro and the dollar respectively even though it begun to record marginal gains against the major trading currencies partly due to the one billion Ghana Cedis bond issued last week and the auctioning of 120 million dollars for the first quarter of 2017 by the central bank.
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Another development was the presentation and the approval of the fiscal policy of government for the 2017 fiscal year. Even though the budget is expansionary, the extent of government involvement in terms of expenditure is constraint by the tax reforms aimed at encouraging private spending to create job and grow the economy. This notwithstanding, the country’s debt to GDP ratio of 74% and interest payment obligation, power sector challenges, high cost of borrowing and unstable currency provides short and medium term risks to the economy.
Despite these challenges, the 2017 budget has inspired hope in the economy through the tax incentives given to businesses to invest, expand and provide jobs while the government uses its limited resources to invest in the critical sectors of the economy for efficient and productive sector performance. This effort by the government needs the necessary support from the Bank of Ghana to improve Ghana’s economic fundamentals.
Given the falling inflation trends, the performance of the cedi especially during 3rd week in March following the auctioning of the 120 million dollars and the issuance of the bond, the upsurge in investor confidence and the general positive outlook for the economy, the Bank of Ghana is likely to reduce the monetary policy rate to complement government’s efforts.
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Figure 1: Monetary Policy Rate & Inflation Rate (%)
Source: Bank of Ghana, Ghana Statistical Service & GN Research
Figure 2: Year to date cedi against the Dollar, Pound and the Euro (%)
Source: Bank of Ghana, Ghana Statistical Service & GN Research
Credit: GN Research
