… as MPC meets this week
Ghana’s formal private sector is eagerly expecting a major cut in the benchmark Monetary Policy Rate to be announced on Monday next week, following the latest meeting of the central bank’s monetary policy committee, which begins today and will end on Friday. Widespread expectations of a cut in the benchmark rate, by as much as 200 to 300 basis points are predicated primarily on the achievement of the BoG’s target band for consumer price inflation of 8% plus or minus 2% which translates into a range of between 6% and 10%. Headline inflation fell to 9.6% for April, its lowest level in nearly five years, and below the psychological single digit threshold for the first time in just as long.
Coupled with continuous monetary easing, begun by the BoG in late 2016, which has seen the MPR cut from a peak of 26% for much of that year, to 18% at the most recent MPC meeting held in March this year, this has provided corporate Ghana with hope that the benchmark rate will be further slashed significantly at the end of this week’s meeting. Instructively, the newly introduced Ghana Reference Rate, which is set by the BoG in collaboration with the country’s commercial banks under the auspices of the Ghana Association of Bankers, has been set at 16.74% for May, down 80 basis points from the 16.82% at which it was first introduced in April.
However, sources within the BoG’s research department, which provides the quantitative data and econometric modelling analyses used by the MPC in setting the MPR, warn that a major cut at the end of this week is unlikely. Indeed, within the central bank itself, unofficial expectations suggest a cut of no more than 100 or 150 basis points as the BoG waits to see if the newly attained, and hard fought for single digit inflation rate can be sustained.
Central bank economists worry that there are still significant upward pressures on inflation, arising from the ongoing increases in crude oil prices on international markets which will translate into higher energy costs in Ghana if they continue. Another source of worry is the demand pull inflation likely to arise from increased public spending resulting from the US$750 million – part of the US$2 billion in proceeds from last week’s new Eurobond issuance by government – that is to be used for new government spending.
Yet another worry is the expected tightening of monetary policy in the United States as some seven years of monetary easing to stem the effects of the most recent global economic crisis which erupted at the turn of the decade, comes to an end. Higher interest rates in the American economy – which is triggering similar interest rate hikes in both Europe and Asia -are seen by monetary authorities in Ghana as a threat to the competitiveness of domestic treasury bills, notes and bonds, which could consequently dissuade foreign portfolio investors from buying up new issuances of government of Ghana debt securities, rather than those issued in western economies, if yields on Ghanaian issuances drop much further.
Ghana’s MPR has fallen from 25.50% as at the end of 2016 to 18% currently following a series of cuts, leaving it at its lowest level in nearly four years. The cuts have been a response to falling inflation from over 18% in 2013, to 15.4% by the end of 2016 and further to 11.8% by the end of 2017. Indeed, core inflation, which excludes volatile items such as energy prices and utility prices has been falling too – from 12.6% in December 2017 to 11.3% in February this year – giving further impetus for the 200 basis point cut in the MPR in March this year.
Focus Economics, a leading global economic forecasting firm expects Ghana’s MPR to end 2018 at 16.70% and 2019 at 14.70%, although the actual out turn may be lower still – Focus Economics expected inflation to remain slightly above the BoG’s target band through to the end of this year, but it has already fallen to within the band, justifying a faster reduction in the MPC than it had projected.
Ghana’s MPR however is still higher than the benchmark rates set by central banks in most other African countries; only 14 countries on the continent currently maintain monetary policy rates of more than 10% while 38 have benchmark monetary policy rates of less than 10%. Ghana’s relatively high MPR has reflected on average lending rates which was 35.50% as at January this year, which is still significantly higher than the 29.44% average for the period 2005 to 2018, but substantially lower than the all time high for the period of 42.84% which obtained in July 2016.