The Monetary Policy Committee (MPC) of the Bank of Ghana has maintained the policy rate at 25.5 percent.
Governor of the Central Bank, Dr. Abdul Nashir Issahaku told journalist that the decision to maintain the policy rate is as result of inflationary pressures which remains high.
This comes after the first meeting of the MPC to review trends and happenings within the economy at its 74th meeting which began over the weekend.
He said at the MPC that, “the Committee viewed the declining trends observed in headline inflation, core inflation and inflation expectations as positive. Nonetheless, there are concerns regarding the inflation outlook, which could be impacted by the pass-through effects of the recent exchange rate volatility, persistent increases in food inflation and the fiscal outturn.”
He added that, “there is therefore the need to return to the path of fiscal consolidation to complement the tight monetary policy stance to deliver on the medium-term inflation target.”
Speaking to the B&FT ahead of the announcement, two economists expressed mixed opinions regarding whether the policy rate should be pruned a second time in two months, especially as the cedi has recently showed signs of its usual volatility, even as it emerges from a year in which it held its own fairly well against the US dollar.
Whilst Consultant on economics and finance, Professor Godfred Bokpin, thinks there is still good reason for a rate cut, Dr Lord Mensah of the Economics department of the University of Ghana says there’s little room for the central bank to cut its key lending rate, since macroeconomic fundamentals remain shaky.
According to Prof. Godfred Bokpin, considering that the cedi fared well last year, and the fact that inflation has dropped somewhat, the MPC should consider reducing the policy rate by about 200 basis points or to 23.5 percent, to boost growth.
“So long as the government is poised to pursuing growth and employment creation, I think the policy rate would have to be reduced,” he said.
“Also, we are looking at inflation that has dropped to 15.4 percent, while the cedi, throughout 2016, was relatively stable; so, I think reducing the rate by 200 or more basis points would be appropriate.”
Prof. Bokpin further said since the new government is also enjoying goodwill from the investor community, it makes the business environment healthy for the MPC to reduce the policy rate.
Dr. Lord Mensah, however, believes there could be increasing dollar trading in the coming months, which could pile up pressure on the cedi, and make a policy rate cut an unfavourable undertaking.
“Let’s look at the cycles in our interest rate. If you look at when we ended the year of festivity, when businesses showed their inventories, you could see that most currencies were converted into cedis. And obviously, if you want to fill the inventories, as a country which is more or less a net importer of commodities, we expect that people will convert more cedis into dollars. Therefore, this will put pressure on the dollar…So, I think what is happening now, together with what I foresee, the MPC bringing the rate down is not possible.”
He added that: “If you look at the focus of the policy rate, it’s more or less inflation target rate and if you look at the trends in our inflation, it has started showing some downward trend and you could also see that other indicators like Treasury Bill rates are coming down.”
In November 2016, the MPC voted to reduce the rate at which it lends to commercial banks by 50 basis points to 25.5 percent, after it had remained at 26 percent for over a year.
At the MPC in July, the Governor announced that the central bank has shifted the forecast for single digit inflation to the third quarter of 2017.
Source: B&FT
