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Business News Mon, 14 Jun 2021

Goldman Sachs predicts further policy rate cut in 2021

The economics research department of Goldman Sachs, the global investment bank, is predicting that the Bank of Ghana (BoG) will cut the policy rate by a further 200 basis points (bp) by the close of the year.

Earlier this month, the Monetary Policy Committee (MPC) of the central bank announced a surprise rate cut—reducing the policy rate by 100 basis points to 13.5 percent—after it judged that the risk of inflation jumping out of the bank’s target band of 6–10 percent was minimal.

Goldman Sachs Economics Research said the cut was against its “unanimous consensus expectations” that the rate would be maintained.

“The MPC struck a positive tone for growth going forward, as both real activity indicators and progress in the vaccination campaign point to a strong rebound in the economy in 2021,” said the investment bank in a report to clients.

“We interpreted the cut as the BoG taking a view that fiscal and external risks have decreased in recent months, most likely supported by the Eurobond issuance in March and by foreign inflows into local-currency debt,” it added.

Following the unexpected action by the central bank, and the announcement of a decline in inflation to 7.5 percent for the month of May, Goldman Sachs has forecast that the conditions are right for the central bank to further reduce the policy rate, which influences banks’ lending rates.

“Given the increased confidence on the fiscal side and the stability of the cedi—supported by capital inflows and gains in the terms of trade—we believe that lower inflation in the coming months will prompt the Bank of Ghana to deliver a further 200bp cut by year-end.

Indeed, we think that the biggest constraints on easing policy for the bank were the fiscal and external risks. With lower pressure from the fiscal side, a stable currency, and falling inflation, we believe that the [bank] will continue to cut rates somewhat further.

We now forecast a 100bp cut in its next meeting in July and another 100bp cut in Q4, to a terminal rate of 11.5 percent, when we expect inflation to be in line with the target,” the investment bank said.

The easing of policy by the BoG has further brightened the outlook for 2021 economic growth, which is expected to be within 4–6 percent, according to both official and private forecasts.
Source: business24.com.gh
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