Opportune time for policy rate fall

Chief Economist at Standard Chartered Bank Africa, Razia Khan, has expressed optimism that the Monetary Policy Committee (MPC) of the Bank of Ghana will, in its next meeting, ease tightening of the monetary policy rate which it has recently maintained at 26 percent.

Speaking after the central bank on Monday maintained the policy rate for the sixth consecutive time, Ms Khan said: “given the relative stickiness of inflation, the Bank of Ghana’s decision to hold its policy rate steady does not come as a huge surprise, despite our base case being for a rate cut.”

According to the StanChart Chief Economist, the MPC’s decision to hold the policy rate steady means that the start of the easing cycle has been pushed back, and it could happen in the next review window.

“In our view, this boosts the likelihood that the easing cycle will begin at the September MPC meeting. The months of July, August and September typically see weaker headline month-on-month inflation gains in Ghana, helped by the harvest,” she said.

The harvest boost in addition to the stability in the local currency, she said, should help bring about lower year-on-year inflation, although risks to inflation persist.

“The renewal of power sector constraints adds to upside inflation risks, despite the authorities’ efforts to extend the benefits of electricity subsidies, even to heavier consumers of electricity,” she added.

According to the central bank, its latest inflation forecast suggests a slight outward shift in the forecast horizon as increases in ex-pump prices of petroleum products slowed the pace of disinflation. Headline inflation is likely to move within the medium-target band of 8±2 percent in the third quarter of 2017, against earlier projections of mid-2017.

The central bank’s latest consumer sentiment survey, conducted in June, reflects a marginal surge in inflation expectations based on the “unanticipated increase in petroleum prices and the recurring energy supply challenges.”

The Bank of Ghana has consistently maintained a tight monetary policy stance with the goal of bringing down inflation which has remained highly erratic over the past 12 months. At its previous meeting in May, the MPC had voted to maintain the policy rate at 26 percent; in that month, however, the inflation rate raced to 18.9 percent.

Economy rebound

Ultimately however, with a primary fiscal surplus being targeted and the Bank of Ghana now subject to a zero deficit financing rule, both monetary and fiscal policy have been tightened significantly.

“Although the slow response of headline inflation to these measures indicates the persistence of elevated inflation expectations, eventually we expect a more significant downtrend in inflation to emerge,” Ms. Khan said.

The country, she said, needs to reinforce the credibility of its reform effort under the ongoing IMF as this could further ease the inflation rate. However, provided that the reform momentum is kept intact, it is only a matter of time before economic conditions allow for a more sustained easing cycle.