No room for further policy rate cuts in 2020 - EIU

The Economist Intelligence Unit (EIU) says there is no room left for a policy rate cut in the remainder of the year, as the central bank announces its penultimate monetary policy interest rate decision for 2020 today.

The central bank last reduced its policy rate in March, by 150 basis points to 14.5 percent, as part of measures to mitigate the impact of the coronavirus pandemic on the real sector. The rate has since been left unchanged despite inflation remaining volatile within the period.

In its latest country forecast, the business advisory firm said the central bank will keep its word on trying to force down the cost of lending rather than increase its rate in response to inflation – which, at 10.5 percent in August, still remains outside the bank’s 6-10 percent target.

“Although inflation is currently above the 6-10 percent target band, we believe that the BoG will maintain rates at the current level (rather than hiking rates in a bid to stem inflation) as economic activity declines and the BoG seeks to boost access to credit to support businesses,” the EIU said.

Consumer price index inflation climbed into the double digits in April – the first time since June 2018 – as the pandemic drove up prices. Inflation reached 11.4 percent in July, before falling by 0.9 percentage points in August.

“Despite a sharp downturn in economic activity, we expect average inflation to increase in 2020, reflecting ongoing currency weakness, monetary easing, asset purchases and upward pressure on the prices of some goods as a result of pandemic-related restrictions and shortages.

“Inflation will moderate in 2021, to 8.3 percent, owing to less disruption to supply chains while domestic demand remains weak. From 2022 we expect inflation to pick up as a result of higher global commodity prices, ongoing currency depreciation and strengthening domestic demand,” the EIU said.

Inflation, according to the firm’s forecasts, will average 8.9 percent in 2022-24, remaining within the official target range of 6-10 percent.

Contraction

Prior to the Ghana Statistical Service’s releasing the GDP data for the second quarter of this year, the EIU’s prediction was a 4.2 percent contraction of the Ghanaian economy in 2020.

According to the firm, although it still stands by its prediction of a contraction of the economy, against government’s target of 0.9 percent growth, it will incorporate the latest GSS data into its next forecast update.

Meanwhile, the Economics Research wing of Goldman Sachs, a global financial institution, has revised its prediction of a contraction of the Ghanaian economy in 2020. In its revised forecast published last week, it said it sees Ghana’s pandemic-hit economy growing at a rate of 1.2 percent this year, following a stronger-than-anticipated performance from some key sectors of the economy in the second quarter.