Policy Rate to decline third time in 2017; an IGS-FSL analysis and forecast

The monetary policy rate is expected to continue its downtrend in July following recent upbeat developments in both the domestic and external markets.

The relative stability of the local currency, the consistent improving inflationary data at both the consumer and producer ends, declining interest rates and improved business sentiment as measured by the composite index of economic activities (CIEA) are some factors to drive the policy rate further downwards.

Prior to the policy rate announcement in March 2017, inflation and interest rates eased by 2.70 percent and 1.10 percent respectively between November 2016 and March 2017. Composite Index of Economic Activities improved to 442.33 points in March 2017 from 425.48 points in March 2016.

The economy benefitted from the dwindled commodity prices on the international market due to the country’s net-importer status. The local currency was relatively fragile to major trading currencies as it depreciated by 8.83 percent against the US dollar within the reporting time frame. In spite of this dynamics and the implications of these indicators on the domestic economy, the MPC slashed the policy rate by 200 basis points as the downside risk outweighed the upside risk.

Similar developments also underpinned May’s moderation of the policy rate from 23.50 percent to 22.50 percent. Between March 2017 and May 2017, inflation eased by 0.20 percentage points whereas interest rate on the 91-Day T-Bill declined by 481 basis points.

Unlike the earlier reduction of the policy rate, the local currency enjoyed relative stability against major trading currencies as it recorded 4.83 percent appreciation against the US dollar. The period also witnessed consistent declines in prices of commodities on the international market. As pairing of risk from both the domestic market and external market, policy rate was eased by 100 basis points by the MPC in May.

With similar improving developments observed between May and July albeit the Cedi’s depreciation against the US dollar, we do not expect the next MPC’s decision to be far-fetched from recent trends. Inflation and Interest rates sustained their downward trajectories to settle at 12.10 percent and 12.32 percent respectively in June.

Although the local currency declined by 3.6 percent from May to June, the rate of depreciation was significantly lower than the figure observed in March 2017. The impressive 1st Quarter growth rate of 6.6 percent, improving public debt stock coupled with the consistent falls in commodities prices on the global commodities market, is expected to further aid in the contraction of the monetary policy in the country. A further drop in the policy rate is expected to facilitate private sector participation by driving the cost on credit facilities lower and boost economic growth.

From the foregoing analysis, we expect the policy rate to settle at 21.50±1.00 percent.