MPC likely to maintain monetary policy rate at 23.5%

GN Research expects Monetary Policy Committee (MPC) to keep the Monetary Policy Rate at 23.5%, due to a positive trend in inflation outlook, a stable currency, an improved investor confidence and the general positive outlook for the economy.

The (MPC) of the central bank is set to announce a new Monetary Policy Rate (MPR), on Monday May 22, 2017, with the prime objective of ensuring price stability and low inflation and support output and employment growth.

This will be the 76th 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. At the last meeting, the committee reduced the MPR by 200 basis points, from 25.4% to 23.5%. The notable reasons given by the bank for this decision include declining headline and core inflation, strong external sector performance, increase Composite Index of Economic Activity (CIEA), positive outlook for economic and industry growth and the easing of the pressures on the Ghana Cedi.

Many things have happened on both the domestic and the global fronts since the meeting in March. At the global level, commodity prices have decreased with the prices of the country’s major exports cocoa and gold falling by almost US$200 and US$28 respectively. However, the economic outlook for emerging economies remains positive with countries such as China and Brazil on a path of better economic recovery. However, the uncertainty surrounding the UK’s exit negotiation from the European Union with European leaders must be a cause of worry for developing countries including Ghana.

On the domestic front, inflation increased marginally from 12.8% in March 2017 to 13.0% in April 2017, ending the six consecutive months decline. This is partly due to the reduction in the MPR by 200 basis points at the last meeting in March and the 15% increase in transport fares in April. Despite the limited reaction from the banks in terms of reducing interest rates after the last reduction in the MPR, it is expected to put upward pressures on inflation. This is reinforced by the increased transport fares. Hence the outlook for inflation is positive.

Another development domestically was government’s issuances of the US$2.2billion bond. The government raised US$1.13 billion from 15 and 7 years bonds and cedi equivalent of US$1.12 billion from 10 and 5 years bond with a coupon rate between 18.95% and 19.85%. This was to increase the reserves of the central bank among others to effectively stabilise the cedi.

As at 12th May 2017, the Cedi recorded a year to date depreciation of 0.21%, 4.40% and 3.63% against the United State Dollar, the British Pound and the Euro respectively. Between March 27th 2017 and 12th May 2017, it appreciated on average by 0.21%, 0.02% and 0.06% against the US dollar, the Pounds and the Euro respectively compared to the 0.06%, 0.09% and 0.10% depreciation against the US dollar, the British Pound and the Euro between 23rd January 2017 and 24th March 2017.

The appreciation of the Cedi between the last MPC meeting and now is mainly not because of changes in the fundamentals of the economy, but because of the Bank of Ghana’s decision to auction US$120m for the first quarter of 2017 and the government’s issuances of the US$2.2 billion bond.

Finally, credit rating agency Fitch on Friday 12th May 2017 upgraded Ghana’s sovereign rating from negative to stable stating government’s progress in stabilizing the macro economy, anticipated higher GDP growth, decline in inflation and budget deficit.

Considering this factors (the external and the internal developments, Groupe Nduom (GN) Research expects the MPC to view the risk to inflation and growth as balanced and maintain the MPR at 23.5%.

Figure 1: Monetary Policy Rate & Inflation Rate (%)

Source: Bank of Ghana, Ghana Statistical Service & GN Research

Figure 2: The performance of the Cedi in 2017 (%)