StanChart okays policy rate tightening amidst resentment for ‘No IMF’ stands
Adnan Adams Mohammed
Standard Chartered Bank (StanChart) has said the Monetary Policy Committee of Bank of Ghana acted decisively to front-load its tightening in defence of the local currency (Ghana Cedi).
The Bank believes that, the combined package of tightening, a policy rate hike that will raise the real policy rate despite accelerating inflation, along with the withdrawal of significant Cedi liquidity from the domestic market, should have a significant impact on the currency, providing a near-term reprieve from Cedi depreciation. A simultaneous announcement that Ghana plans to borrow US$2 billion through the syndicated loan market in order to replenish its foreign exchange (FX) reserves, should further boost sentiment, helping to stabilise the currency.
Despite the Bank’s hope for better results of MPC’s decision on the economy, it expressed worry and resentment over the economic management team decision that failed investor expectations that Ghana might opt for the external anchor of an IMF programme to boost fiscal consolidation plans proved to be unfounded.
“Nonetheless, markets will await the announcement of additional fiscal measures, expected later this week. These could yet shore up confidence, despite disappointment over Ghana’s plans not to seek an IMF programme”, StanChart said in a policy response circular it should and sighted on scoail media. “Investor expectations were disappointed, diverting some of the focus from the BoG’s forceful monetary policy response.”
While these monetary policy measures are welcome and demonstrate the BoG’s resolve to achieve macroeconomic stabilisation, other issues loom as markets await the announcement of additional fiscal measures, expected later this week. These could yet shore up confidence, despite disappointment over Ghana’s plans not to seek an IMF programme.
“Moreover, today’s tightening will – out of necessity – add to domestic debt service costs, further pressuring the fiscal outlook. Failure to pass a much-touted 175bps e-levy to date, as well as the partial reversal of some planned revenue reforms addressing benchmark values for imports, have taken a toll on investor confidence” StanChart noted.
The MPC yesterday increased the policy rate by 250 basis points to 17 percent. This is the first time the Central Bank has increased the key rate since November 2021.
At a press briefing on Monday, March 21, 2022, the Governor of the Bank of Ghana, Dr. Ernest Addison said all is being done to check inflation. He attributed the upward review of the rate to the sharp rise in inflation as well as the upsurge in prices of goods and services as well as petroleum products.
“Headline inflation has risen sharply to 15.7 percent in February 2022, and both headline and core inflation are significantly above the upper limit of the medium-term target band. The uncertainty surrounding price developments and its impact on economic activity is weighing down business and consumer confidence. The risks in the outlook for inflation are on the upside and include petroleum price adjustments and transportation costs, and exchange rate depreciation.”
“Under these circumstances, the committee has decided to increase the policy rate by 250 basis points to 17 percent. The Bank’s latest forecast still depicts an elevated inflation profile in the near term, with inflation falling within the medium-term target band within a year”, he revealed.
At this MPC meeting, the combination of tighter global financing conditions, sharp pressures on the exchange rate, and elevated inflation pose some policy challenges.
“The Bank of Ghana will, effective, 1st April 2022, enforce the following measures in relation to universal banks: The cash reserve ratio has been increased to 12%, the capital conversation buffer has been reset to the pre-pandemic level of 3% making the capital adequacy ratio a total of 13% and the provisional rate for loans in the other loans exceptionally mentioned category, has been reset to the pre-pandemic level of 3%,” Dr. Addison added.