MPC to hold policy rate at 21%

The Monetary Policy Committee of the Bank of Ghana is expected to vote to keep its policy rate, for the second time this year, at the present 21 percent -- in line with government’s objective to tame inflation which continues to drift farther away from targets.

The Monetary Policy Committee of the central bank began assessment of developments in the economy on Monday, and is expected to announce on Wednesday a policy rate that will signal the cost of borrowing and direction of the economy for at least the next three months.

Many analysts have predicted that the meeting, which is the first since the country signed onto an IMF budgetary support programme, will come up with a policy rate that induces economic growth without sacrificing price stability.

“It is more likely for the MPC to maintain the rate at 21 percent, although I would not be surprised by a rate hike. There is still underlying inflation and currency depreciation pressures which still require a tight monetary policy stance; but, again, the growth outlook is also severely constrained by the energy crisis as well as the persistently high cost of credit. Further, it wouldn’t be efficient for the Bank of Ghana to cut interest rates, not at this time and at this moment,” said Samson Akligoh, analyst and Managing Director of InvestCorp.

The ongoing MPC deliberations are happening at a time concerns have been raised about the high cost of borrowing from banks, which financial institutions have attributed to weak management of the economy -- an assertion policymakers have played down.

The MPC committee at its last meeting in February decided to keep the monetary policy rate at 21 percent due to the drop in risk of inflation, resulting from lower crude oil prices on the international market.

Inflation has since increased from 16.5 percent in February to 16.6 percent in March, and the decision to be announced tomorrow is expected to meet demands of the International Monetary Fund (IMF) which has called on the central bank to do more to fight inflation.

The Fund’s agreement with Ghana stated that: “The BoG should stand ready to adjust the monetary policy rate as necessary to achieve the inflation and reserves targets, and use all tools available to steer the interest rate more closely to the policy rate”.

According to Mr. Akligoh, the call by the Washington-based lender is expected so far as inflation remains outside the BoG’s own forecast band.

“I am not sure whether monetary policy can help reduce and sustain inflation in the region of 8 percent in the short-term. I think this will require structural changes and fiscal consolidation,” he told the B&FT.

Another economist, Dr. Raziel Obeng-Okon, also said: “The calls for tight monetary policy on the part of the MPC can only be successful with the support of stringent fiscal consolidation. The uncertainties surrounding achieving the inflationary target within the IMF programme include the pass-through effects of currency depreciation, cost-push effects of high interest rates, and the energy crisis”.

In response to the IMF's call for more effective inflation-targetting, the BoG has tightened its financing of government -- which analysts consider to be a very significant step. What the IMF now expects is that the central bank will react quickly if inflation threatens to spike; a commitment the BoG has already given to the Fund.

According to the government’s deal with the IMF, the Bank of Ghana is to implement a raft of measures to make the monetary policy rate more effective: such as reducing the central bank’s financing of government budget deficit to 5 percent of previous year’s revenue in 2015, and reducing it to zero from next year onward.

The Fund also wants a reduction of BoG’s interference in the foreign exchange market by abolishing the compulsory surrender requirement of foreign exchange from key sectors of the economy, and BoG’s practice of securing foreign exchange to fund priority sector imports.