Governor of the Bank of Ghana, Dr. Ernest Addison
The Monetary Policy Committee (MPC) of the Bank of Ghana (BoG) is today expected to announce its next monetary and financial policy actions to combat the economic fallout of the novel coronavirus, having put the devastating impact of the virus under the microscope for the past two months.
The second MPC meeting since the virus was discovered in Ghana is expected to follow up on a raft of policy directives engineered in March to provide ammunition to the banking sector to deal with the economic impact of the virus.
The highlight of the committee’s meeting in March saw a 150-basis-point reduction in the monetary policy rate to 14.5 percent, with banks impressed upon to further slash lending rates to ease credit.
Even before the full effect of the policy rate cut and the allied policy directives announced on March 18 is felt, the committee will have to contend with a sudden jump in the inflation rate to a two-year high of 10.6 percent, which is beyond the BoG’s medium-term target of 8 plus or minus 2 percent.
According to the Ghana Statistical Service, the April inflation rate was largely driven by the effects of a lockdown in Accra and Kumasi, which had led to massive panic buying as households attempted to stock up on food and other necessities required to get through the period of restrictions on movement.
The agency explained that the upward movement was caused by a sharp increase in food inflation, which stood at 14.4 percent compared to the average of 8.8 percent recorded over the past eight months.
While Courage Martey, an economist with investment banking firm Databank, contends that the sudden hike in the inflation rate could be one-off and does not necessarily reflect underlying pressures, he maintains that the BoG would be cautious going forward.
“The latest inflation rate effectively closes the window for a further rate cut,” he told the Business24 in an interview.
In his view, the Bank of Ghana will be keen to assess the impact of measures announced to improve liquidity rather than seek to inject further liquidity into the system.
Exchange rate deterioration
The local currency enjoyed an impressive run against all major trading partner currencies in the period before the COVID-19 pandemic broke out in Ghana.
The cedi’s notable performance against the dollar was a 3.7 percent year-to-date appreciation as at March 12, when the first two cases of the coronavirus were reported here.
Since that period, the cedi has plunged by more than 5.5 percent against the greenback, bringing the year-to-date, May 13, performance to about 1.4 percent depreciation.
While the deterioration over the last two months has been sudden, the Bank of Ghana will be minded about the fact that the cedi had a worse run in the same period last year, when it depreciated by 5 percent.
Nevertheless, the policy rate action to be announced today is expected to prevent a further run on the local currency, as foreign investors in local bonds over the period have shown the proclivity of moving their funds to safer markets.
It is expected that with Ghana’s net foreign reserves – which stood at US$6.85 billion as at February 2020 – not seeing much inflows due to shortfalls in export revenues because of COVID-19, the central bank will be careful not to ruffle the feathers of foreign investors.
Although the government has benefitted from balance of payments support of about US$1.5 billion from the IMF and World Bank to battle the effects of the pandemic, the extent of the impact has pushed authorities to be cautious.
As Mr. Martey sums it, “I don’t think that there is reason to cut the policy rate. At best it should be maintained.”
MPC’s initial coronavirus response
The central bank, in wanting banks to lend more to critical sectors such as pharmaceuticals and manufacturing, lowered the primary reserve requirement (PRR) to 8 percent from 10 percent.
Also, to enable banks provide the needed financial support to other sectors of the economy, it freed up liquidity by reducing the Capital Adequacy Ratio to 11.5 percent.
Banks were also given permission to make some allowance for businesses that may default on their loan repayments as a result of COVID-19.
The central bank in its effort to promote digital payments directed mobile money companies to abolish charges on transactions of up to GH?100 (minus cash-outs).
Also, the know-your-customer requirement to open a mobile money account was relaxed to allow customers use the registration details of their SIM cards to register for mobile money accounts.
