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Rising fuel prices, new taxes likely to keep policy rate static – Analysts

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Mon, 31 May 2021 Source: thebftonline.com

As the Bank of Ghana prepares to announce a new policy rate later today, analysts say a close look at the economic indicators and happenings in the country make it likely for the rate to be maintained, although businesses would appreciate a cut… even marginally.

Key factors the Monetary Policy Committee (MPC) takes into consideration before making a decision on the policy rate include inflation, exchange rate, foreign investors’ reaction, and the general economic situation among other factors. These indicators, according to the analysts, have not been robust enough to necessitate a policy rate cut.

For example, inflation – a major determinant of the policy rate – has been very erratic this year. It started the year with 9.9 percent but moved to 10.3 percent in both February and March and declined to 8.5 percent in April. One would argue that the current rate falls within the central bank’s target band (60-10 percent) and, hence, makes a case for policy rate reduction.

Then, another factor is the appreciation of the local currency against its major trading partner, the US dollar. Data from the Bank of Ghana show the cedi has recorded no loss of value for five consecutive months – a feat that has never been achieved in memorable history.

However, in an interview with Director of the Institute of Statistics, Social and Economic Research (ISSER) of the University of Ghana, Professor Peter Quartey, he said even though inflation has declined and is currently within the target band, its future looks bleak – given the increment in fuel prices and effect of the new taxes introduced by government.

“We are told that the new taxes will kick-in during May and already prices of goods have started increasing on the market; so it is not just about current inflation but also inflation expectation. In determining the policy rate, you have to look at inflation expectation and not current inflation alone. And from the fuel price increments and new taxes, inflation is expected to inch-up going forward. Factoring all these into consideration, I think it will be best to maintain the policy rate for now,” he said.

His view was reechoed by banking consultant Dr. Richmond Atuahene, who also thinks inflation risk has been heightened by the fuel price increment and new taxes, hence there is no room for a cut in the policy rate.

He further stated that the exchange rate performance is mainly due to the Eurobond money that came in to shore-up the Bank of Ghana reserves, and not necessarily because the cedi has become stronger than the dollar.

“The reduction in inflation for April is just short-term. The fuel price increase and the new taxes will cause it to shoot up in the coming months. And with the exchange rate, the cedi has not depreciated because all the monies borrowed recently have been used to shore-up reserves at the Bank of Ghana, and the Bank has been using it to intervene in the market; and that is why the cedi looks stable. So, I think the policy rate will be maintained; especially with the recent increase in fuel and taxes, because they feed straight into inflation. And the Bank of Ghana would not want to risk it and drop the policy rate,” he said.

Another factor that may affect the policy rate is the reaction of foreign investors who have bought the country’s bonds. These foreign investors are attracted by high interest rates on the bonds, and any reduction in policy rate will translate into reduction in their yields – which will push some to move their monies to other markets that offer higher yields. This, Prof. Quartey says, would not be a risk government will want to take at this difficult moment.

“We have foreign investors who hold onto our local bonds. If you reduce the policy rate, they may exit the market; and that can lead to capital flight. We saw that in 2019, and so we must be cautious of that situation too,” he said.

With regard to the possibility of increasing the rate, the professor said it is not an option at all, as that would come as a big blow to local businesses and defeat government’s agenda of stimulating the private sector.

“As for an upward review, is not in tandem with government policy. Government policy is to stimulate the private sector to ensure that the cost of doing business is affordable and supportive of the business environment. So, an increase in the policy rate will be at variance with government policy. A reduction, on the other hand, would be in line with government policy: except that the factors will not support a reduction.

“I would be more inclined toward maintaining the policy rate because some of the key indicators – inflation, inflation expectation, exchange rate movement, level of economic activity, among others – I don’t think have seen any major shift,” he said.

If the analysts’ projections come true, it will be the seventh consecutive time the policy rate has been maintained at 14.5 percent since the pandemic struck the country.

Source: thebftonline.com
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