Cedi to gain strength this week… as MPC decisions take full effect – Analyst
Adnan Adams Mohammed
The recent monetary measures announced by the Bank of Ghana is expected to impact on the exchange rate this week, thus, giving the local currency a feet stand against the U.S dollar, an economist has said.
The senior economist with databank indicated that, checks from some forex bureaus and commercial banks show that the cedi is gaining marginal strength against the dollar as at the time of interview, last week, as the local currency was trading averagely at GH¢7.84 to the dollar on the retail market, compared to about ¢8.06 couple of days before the Central bank’s announcement last week. However, the Bank of Ghana pegs the cedi to the dollar at ¢7.112 (mid-rate).
The Central bank, last week, announced a significant increase in the policy rate by 2.5 percent to 17% from a previous 14.5%. This is expected to entice investors to acquire cedi denominated instruments because of the attractive yields. Though cost of borrowing will go up, increasing cost of living and doing business, the Bank will in the interim mop up excess liquidity in order to control inflation and reduce interest in the dollar denominated assets. But, the economist said, its early days to predict the fortunes of the cedi, the market will definitely react to the policy decisions by the Central Bank.
“In the interim, we’ll say its early days yet. In addition to that, the cedi also has a history about its performance so from the weeks ahead, we’ll start to analyse the foreign exchange market to see how the cedi will respond to some of these announcements”, Senior Economic and Currency Analyst at Databank Research, Courage Martey said.
“But on the face of it, this appeared to be good measures; aggressive and decisive measures from the Central Bank which we expect to be backed by the fiscal measures, so that going forward, the market – at least sentiments – should start to improve. Once it’s starts to improve, we should start to see it reflecting in the pricing behavior of participants on the market”, he added.
The MPC’s decision in the interim is expected to mop up excess liquidity in order to control inflation and reduce interest in the dollar denominated assets.
“When Cedi liquidity finally tightens, what you might see is that, those hoarding dollars in their accounts will not want to go and borrow expensive cedi. They will rather have to sell their dollar holdings to buy cedis and that could increase the supply of dollars on the market and slow down the pace of depreciation”, Mr. Martey stated.
Beyond the policy rate, the Bank of Ghana announced measures which will take effective from April 1st, 2022,
The measures in relation to universal banks include an increase in the Cash Reserve Ratio to 12%; the Capital Conservation Buffer reset to the pre-pandemic level of 3%, making the Capital Adequacy Ratio a total of 13% and the provisioning rate for loans in the Other Loans Exceptionally Mentioned (OLEM) category reset to the pre-pandemic level of 10%.