Tough times ahead as Wampah hints at policy rate hike

Governor of the central bank Dr. Kofi Wampah has reiterated the Bank’s intention to continue maintaining a tight monetary policy in a bid to control the economy’s high inflation rate.

Speaking at the 2015 Bankers’ dinner organised by the Chartered Institute of Bankers (CIB) as part of activities marking the bankers’ week celebration in Accra, themed ‘Stability of The Local currency, a pre-requisite for a sustainable economic growth’, Dr. Wampah admitted that the wobbly economy this year -- which is largely attributable to the power shortfalls -- has served as a scourge for many businesses, but he remained upbeat about a turnaround with the implementation of certain measures which include tightening monetary policy.

“In the coming year, the Bank of Ghana will continue to monitor developments in the market and take appropriate measures, where necessary, to prevent excessive volatility of the currency and gradually bring down inflation and its expectations.

“In particular, the Bank of Ghana will continue to maintain a tight monetary policy stance until such a time inflation expectations are well-anchored. This, together with continued physical consolidation as announced in the 2016 budget and structural reforms in the money making markets, will help improve stability in those markets,” Dr. Wampah said.

This point is underscored by the Trends and Trading Consult in their post-budget analysis, published in the B&FT on Wednesday, which states that uncontrolled spending in next year’s election will push the central bank to adopt a tight monetary policy, but remains doubtful as to whether this will help achieve inflation target.

“Naturally, the BoG will be driven to act like it always has to manage the money supply (inflation) -- by raising the prime rate -- in order to mop up the excess liquidity. The result of such a move might be an end of year prime rate range between 25% - 28%. While this action may slow inflation down, it is not likely to bring it below 11% by end of the year.

“Even in the very unlikely situation where expenditure and the BoG’s counter-measure for the year evens out so government reaches its target, workers and households whose incomes do not rise above 10% will most certainly experience the same economic conditions they did in 2015: with the likelihood their conditions will get worse,” the article states.

This comes as a bad news to the business community, who were hoping the central bank would from next year begin reducing policy rates to allow banks give loans at flexible interest rates.

Many businesses, especially SMEs, have been crowded out by high interest rates resulting from tight monetary policy that makes it attractive for banks to lend to government rather than businesses because of the high risk involved in lending to the private sector.

Dr. Wampah further commented on the depreciating local currency, citing reduced capital flows and declining commodity prices as the major cause -- adding that a stable exchange rate regime is admittedly important for enhancing business confidence, providing an attractive environment for international capital flows and stimulating economic growth.

“Some exchange rate flexibility is needed to facilitate adjustments to external shocks and to prevent misalignments that would prove detrimental to trade and economic growth,” he said.