Why monetary policy should not be eased further yet

A week ago, the Bank of Ghana announced that it was retaining its benchmark Monetary Policy Rate at 16 percent for the next two months. Corporate Ghana is not particularly enthused about the central bank’s refusal to ease monetary policy even though inflation is now at its lowest level in several decades, at 7.8 percent, and the cedi is relatively stable against the United States dollar.

While we sympathize with enterprises that were hoping for a cut in the key rate that would have put downward pressure on lending rates, we however see with the central bank.

For one thing, the fiscal deficit is running ahead of target and this is worrying. Since the incumbent administration assumed power it has ruthlessly cut public spending to match revenue shortfalls, it is therefore worrying that the year in which the International Monetary Fund’s programme ended is the one where government failed to institute spending cuts commensurate to revenue shortfalls. The impending failure to meet the fiscal deficit target is worsened by the fact that the target is higher than the preceding year’s for the first time since the IMF programme began back in 2015.

Besides, the fall in headline inflation is the result of rebasing not a real sudden slowdown in the rate at which consumer prices are increasing. Therefore, the BoG is right not to be carried away by the sudden fulfilment of the median of its long-pursued medium-term inflation rate.

Indeed, it should be noted that underlying inflation, measured by core inflation excluding utility tariffs and energy prices have inched up slightly. Add to this the BoG’s report of a moderate pick-up in inflation expectations from businesses, consumers and the financial sector.

Economists calling for further monetary easing point out that although economic growth is strong at 5.7 percent year on year, as at the second quarter of this year, non-oil growth is only 4.3 percent which means the economy could do with a monetary stimulus.

But while we agree, we assert that this should not be done at the risk of the hard-won macro-economic stability which has been restored. We are particularly concerned about this because we are on the cusp of yet another election year and remember only too well how previous ones have panned out.;

We are not too confident about the five percent cap on the fiscal deficit being adhered to next year, especially considering this year’s performance. Therefore it is imperative that the economy is as stable as possible at the start of the year.

This is where the BoG’s decision to retain the MPR is so strategically important.