News Guide Africa

Tag: Monetary Policy Committee

  • BoG reviews health of economy

    The seven member of the Monetary Policy Committee, (MPC), of Bank of Ghana and chaired by the governor, Dr Ernest Addison will this week begin its bimonthly meeting to review the health of the economy and also announce a new policy rate for the next couple months.

    The policy rate is the rate at which universal banks borrow from the central bank as their last resort and also serves as a benchmark in setting the Ghana Reference Rate.

    Although inflation has inched up marginally, some economists believe the policy rate could be maintained at 29.5 percent for the second consecutive time.

    The recent price developments indicate that the inflation surge in the economy, witnessed since December 2021, has peaked. The latest readings since the January indicated consistent drops in headline inflation from the peak of 54.1 percent in December 2022 to 53.6 percent in January 2023, 52.8 percent in February, 45 percent in March and 41.2 percent in April, 42.2 percent in May and 42.5 percent in June this year.

     

    The main drivers of this inflationary trend are food and non-food items, which account for 54.2% and 33.4% respectively.

    The MPC meets bi-monthly to assess economic conditions and risks to the inflation outlook, after which a policy decision is made on positioning the MPR. Each decision signals a monetary policy stance of tightening, easing or stay put.

     

    The policy decision is arrived at by consensus with each member stating reasons underlying a preferred MPR decision.

     

    The primary objective of the Bank of Ghana is to pursue sound monetary policies aimed at price stability and creating an enabling environment for sustainable economic growth.

    Price stability, in this context, is defined as a mediumterm inflation target of 8±2 percent. This implies that headline inflation should be aligned within the medium-term target band for the economy to grow at its full potential without excessive inflation pressures.

    Other tasks for the Bank of Ghana include promoting and maintaining a sound financial sector with efficient payment systems through effective regulation and supervision. This is important for intermediation since risks associated with financial markets are also considered in the monetary policy formulation process.

  • ‘Currency Board’ will effectively address monetary management infractions – IEA

    ‘Currency Board’ will effectively address monetary management infractions – IEA

    Adnan Adams Mohammed

     

    As Ghana visage for a way out of its cyclical economic management mess, the government is advised to establish a ‘Currency Board (CB)’ to help in the monetary management process of the Bank of Ghana.

     

    The ‘Currency Board’, the Institute of Economic Affairs (IEA) believes will help stabilise the cedi and prevent instability in the economy in times of shocks. The Institute also to limit the Central Bank lending to the government

     

    These monetary control and management factors deficiencies have been the bane of Ghana’s economic management. According economists, the CB system has limited inflation, checks currency volatility and better position balance of payments.

     

     

     

    is pushing for the establishment of a Currency Board (CB) to limit the Central Bank lending to the government, a move it believes will stabilise the cedi and prevent instability in the economy in times of shocks.

     

    According to the institute, since

     

    “You see, a Currency Board (CB) is a rigid monetary management system that is hedged in strict rules, with little room for discretion. The CB does not lend to government and it covers its currency fully by foreign exchange”, Lead Researcher at the Intitute, Dr. John Kwakye, in a paper published and titled “Institutionalising Fiscal Discipline and Macroeconomic Stability for Sustained Growth in Ghana: The Constitutional Pathway” noted.

     

    “The CB system has limited inflation, the currency does not depreciate and balance of payments crises are rare. This is close to the system in our Francophone neighbours, who restrict their Central Bank lending to governments and provide adequate cover for their currency, the CFA.”

     

    IEA buttressed its points that, the Francophone countries system guarantees them low inflation and a stable currency, but “you have Ghana that has chosen an independent Central Bank to conduct discretionary monetary policy’.

     

    It also blamed the Central Bank of Ghana for some of the economic woes, saying, “The Central Bank provides significant lending to government and covers the cedi with limited foreign exchange (40% in the Act). No doubt we face perennial price and currency instability!”

     

    “It is for this reason that some of us have argued that if we continue to abuse policy discretion and pay a high price for it in terms of macroeconomic instability, then we better hedge our policies by rules; tie our economic managers hands, so that we can enjoy rules-driven macroeconomic stability!”, it added.

     

    Finally, the IEA said despite Ghana having rules such as the Public Financial Management Act, the Bank of Ghana Act and the Fiscal Responsibility Act, the rules have not work because of lack of political way.

     

    “Let me say that it is not that we have had no rules at all in fiscal and monetary management. In fact, I can mention a couple of them, such as the Public Financial Management Act, the Bank of Ghana Act, the Fiscal Responsibility Act and the relevant provisions in the 1992 Constitution, which represent attempts to introduce rules in our fiscal and monetary management system”.

     

    “However, there are serious questions regarding not only their enforcement but their effectiveness as well. And that is the reason we feel strongly about the need to give constitutional backing to some of these rules”, it concluded.

     

  • Local banks resort to target lending.. mining firms luckiest– Fitch

    Local banks resort to target lending.. mining firms luckiest– Fitch

     

    Adnan Adams Mohammed

     

    The banks suffering from fall in capital levels due to the domestic debt exchange program (DDEP) may resort to target lending, Fitch Solutions has said,

     

    The investor firm predicts that, industries with low non-performing loans (NPLs) ratios and positive outlook, especially the mining sector may receive lending from the banks.

     

    While the mining sector has a low NPL ratio of 4.0%, with a positive outlook forecast for gold mining in Ghana which accounts for 95% of the country’s mineral revenue; the construction sector, which has about 35% NPL ratio ( thus, one-third of all loans are non-performing) as estimated by Fitch, is expected to receive less lending from local banks.

     

    “Local banks will be more inclined to lend to industries with low non-performing loans (NPLs) ratios and positive outlook, especially since we expect to see a rise in NPLs in the coming quarters, given the challenging macroeconomic backdrop and slowdown in loan growth”, Fitch Solutions said in its latest report.

     

    “We think that the Mining & Quarrying sector stands out as it has a low NPL ratio of 4.0%, and as we forecast a positive outlook for gold mining in Ghana (which accounts for 95% of the country’s mineral revenue)”, it explained.

     

    On the other hand, it said nearly one-third of all construction loans are non-performing, which suggests that banks are unlikely to increase their exposure to this sector amid challenging economic conditions.

     

    According to Fitch Solutions, the domestic debt restructuring programme has led to a significant fall in the capital levels of banks in Ghana and could threaten the solvency and stability of the sector.

     

    It said: “Banks are entering this phase with a mixed capital picture, with some banks very close to the minimum regulatory capital level of 13.0%”.

     

    Fitch Solutions also pointed out that capital buffers have fallen considerably in 2022, despite a sudden rise in December.

     

    The fall, it noted, was largely driven by mark-to-market losses on investments and increases in risk-weighted assets of banks, due to the depreciation of the cedi and growth in loans and advances.

     

    However, capital levels narrowly avoided falling below the minimum requirement in December 2023, likely as a result of banks retaining more of their earnings, in preparation for expected losses in profits and capital in 2023.

     

    “The debt restructuring and fall in capital could lead to higher funding costs for banks if they become less creditworthy, and could significantly impact the banking sector’s solvency and stability”, Fitch Solutions warned.

     

    The warning by Fitch Solutions dovetails into similar sentiments expressed by the Bank of Ghana recently.

     

    Admittedly, Bank of Ghana at its Monetary Policy Committee meeting press briefing, last week, indicated that macroeconomic challenges and the recent domestic debt exchange programme (DDEP) have weakened banks’ capital buffers.

     

    The situation, according to the Governor of the central bank, Dr Ernest Addison, requires urgent measures to forestall financial stability risks.

     

    “The macro-prudential risk assessments conducted during the last MPC meeting indicated increased pressure on profitability and solvency of banks prior to the implementation of the DDEP”.

     

    “The preliminary data available at this MPC, show that the pre-pandemic capital buffers in the banking sector have been weakened somewhat by the recent macroeconomic challenges and the DDEP, although banks remain liquid”, he explained.

     

    Consequently, the governor noted that, “These require contingency measures by banks, supported by the regulatory reliefs to contain potential risks to financial stability.

     

    “The Bank of Ghana will continue to monitor these developments going forward, and stands ready to act very swiftly to safeguard the stability of the financial sector”.

  • BoG likely to hike policy rate further

    BoG likely to hike policy rate further

    By Elorm Desewu

    With the recent price hike in the petroleum products couple with the rise in year on year inflation, the Bank of Ghana is likely to raise the policy rate further by 150 basis points to settle at 20.5 percent from the current 19 percent.

    Recent price developments indicate elevated pressures arising from the sharp increase in global energy and commodity prices, and the consequential effects on rising domestic ex-pump petroleum prices and transportation costs, food prices, as well as the pass-through effects of the recent exchange rate depreciation in the second quarter of 2022.

    The Monetary Policy Committee, (MPC) will from this week begin to review the health of the economy and also announce a new policy rate for the next couple of months. But there strong indication that the BoG would hike the policy rate further in attempt to anchor inflation.

    The policy rate is the rate at which universal banks borrow from the Bank of Ghana as their last resort and also serves as a benchmark in setting the Ghana Reference Rate.

    Figures released by the Ghana Statistical Service, (GSS), indicate that, year on year inflation measured by the Consumer Price Index, (CPI), has inched up to 29.8 percent for the 12 months period ended June 2022, from 27.6 percent recorded in May 2022.

    This represents a two percentage point increase in the inflation rate compared to the 27.6 percent recorded in May 2022.

    The trends suggest that price pressures were increasingly becoming broad-based, reflected in almost all components of the consumer basket, from both domestic and imported sources.

    Non-food inflation went up significantly from 25.7 percent in May to 29.1percent in June 2022, while food inflation also rose from 30.1 percent to 30.7 percent over the same comparative period.

    The upward adjustments in petroleum products and transport fares with attendant second-round effects on goods and services, have pushed up inflation and inflation expectations.

    The heightened uncertainty in energy prices, prolonged global supply chain holdups, the passthrough of the recent exchange rate depreciation, and upward adjustments in ex-pump petroleum prices and transportation costs, present significant upside risks and are expected to exert pressures on domestic prices in the near term.

    The continued uncertainties surrounding food prices is also likely to add to the upside risks to the inflation outlook. On the downside, it is expected that monetary policy tightening, in tandem with the announced fiscal consolidation efforts, would help moderate inflationary pressures in the outlook.

    The risks in the outlook for inflation emanating from both external and domestic sources, as well as triggered by both supply-side and demand-side shocks are clearly on the upside.

    At the May 2022 meeting, therefore, the MPC hiked the policy rate by 200 basis points to 19 percent with the view that it needed to decisively address the current inflationary pressures to re-anchor expectations and help foster macroeconomic stability.

  • Fiscal deficit worsens by 0.3% of GDP

    Fiscal deficit worsens by 0.3% of GDP

    Adnan Adams Mohammed

    The Bank of Ghana’s provisional data for the first quarter of 2022, indicated an overall broad fiscal deficit (cash, excluding energy sector payments, financial sector clean-up costs) of 2.6 percent of Gross Domestic Product (GDP).

    This is against the programmed target of 2.3% of GDP.  The corresponding primary balance for the period was a deficit of GH¢2.3 billion (0.5% of GDP), against a deficit target of GH¢1.4 billion (0.3% of GDP).

    Over the period, total revenue and grants amounted to GH¢16.7 billion (3.3% of GDP), below the projected GH¢19.3 billion (3.8% of GDP).

    Total expenditures amounted to GH¢27.0 billion (5.4% of GDP), below the programmed target of GH¢30.5 billion (6.1% of GDP).

    However, the Monetary Policy Committee (MPC) during its press conference indicated that, it observed that execution of the budget for the first quarter was broadly in line with targets although there was a minor deviation in the deficit target, stemming largely from low revenue receipts.

    It is the expectation of the Committee that fiscal consolidation will take hold gradually and the mid-year budget review will provide further fiscal fine-tuning to ensure that the fiscal consolidation efforts stay on track.

    On the general economic overview, the central bank at a press briefing, last week, said: “In sum, the Committee observed that the global growth recovery is showing signs of a slowdown, on account of heightened risks emanating from lingering supply chain bottlenecks, China’s zero-Covid policy, and the Russia-Ukraine war. Concurrent with the growth slowdown is the sharp rise in inflation across several advanced and emerging market economies, which has posed some challenges to central banks globally. Global price pressures have broadened beyond the volatile items of energy and food.

    “This has prompted some coordinated monetary policy tightening in Advanced Economies and most Emerging Market and Developing Economies and triggered tightened global financing conditions. The spillover effects of these policy responses have impacted economies through the trade and finance channels, with vulnerable developing countries faced with capital flow reversals and currency pressures. Ghana’s economy is already facing some of these headwinds from these spillover effects”.

    It said growth prospects in the domestic economy remain positive and the Bank’s high-frequency indicators point to continued and increased momentum in economic activities with private sector credit showing some improvement in real terms, despite the increased price pressures.

    “All these are resulting in a closure of the negative output gap. The banking sector remains robust, with sustained growth in total assets, investments and deposits. However, business and consumer confidence have dipped, reflecting the sharp depreciation of the currency and the general high inflationary environment, which has resulted in higher input costs for businesses. A quick turnaround, with more confidence-building measures to counter these conditions, would provide further boost to the real economy”, it added.

  • Trade surplus improves as it almost doubles in value

    Trade surplus improves as it almost doubles in value

    Adnan Adams Mohammed

    Provisional data as released by the Bank of Ghana indicates a trade surplus of US$1.3 billion in the first four months of the year, compared with a trade surplus of US$778.00 million in the same period of last year.

    The improvement in export earnings was attributed to crude oil and non-traditional exports. Crude oil export receipts recorded significant growth of 61.0 per cent to US$1.9 billion, due to price effects, while gold exports improved by 3.6 per cent, also supported by price effects.

    Non-traditional export receipts crossed the US$1.0 billion mark in the review period and contributed significantly to the trade surplus. These developments far outweighed the 7.7 per cent growth in total oil imports in the review period, on the back of compressed non-oil imports.

    Accorcing to the Monetary Policy Committee (MPC), the trade surplus was offset by investment income outflows and net services payments, resulting in a current account deficit of US$128.15 million (0.2 per cent of GDP) for the first quarter of the year, representing a marginal improvement from the current account deficit of US$197.0 million (0.2 per cent of GDP) recorded in the first quarter of 2021.

    The capital and financial account, however, recorded some significant outflows from net portfolio reversals and net private capital outflows, which resulted in an overall balance of payments deficit of US$934.46 million for the first quarter of 2022, compared with a deficit of US$429.93 million, same time last year.

    Although, commodity prices have remained volatile due to the ongoing geopolitical tensions. Average crude oil prices gained 42.0 percent on a year-to-date basis to settle at US$106.2 per barrel in April 2022, supported by supply constraints arising from the geopolitical tensions between Russia and Ukraine.

    Gold prices also gained 8.1 per cent to settle at US$1,935.89 per fine ounce, on the back of increased safe-haven demand amid global inflation concerns.

    Similarly, cocoa prices went up by 4.4 percent to settle at US$2,591.06 per tonne in April 2022, compared to the US$2,481.95 per tonne in December 2021, due to unfavourable weather conditions across West Africa.

    The favourable commodities price trends positively impacted the trade account, as export inflows outweighed imports.

  • A bite at BoG’s inflation targeting framework.. is it still effective or a ‘try your luck’?

    Adnan Adams Mohammed

    As inflation rate in the country has leapfrogged within past few months to record highest rate in about 18 years has unveiled the Bank of Ghana’s inflation control framework to criticism. 

    The current inflationary trend, despite the Monetary Policy Committee of the central bank raising the policy rate by about 250 basis points last month, yet, it was that month annual inflation rate jumped from 19.4% in March to 23.6%, the highest since January 2004. Not only is the inflation substantially above the Bank’s target of 8+/-2 %, but it has also markedly outstripped the current policy rate of 17%.

    While inflation is high it is also straining economic growth together with slowing global output and a 2.5 percentage point increase in March in the key interest rate, the biggest hike since at least 2002. The S&P Global Ghana Purchasing Managers’ Index has also been below 50 since February, indicating a deterioration in business conditions. 

    All things being equal an increase in the policy rate is supposed to tame the rate of inflation, but in the current development has disapproved the macroeconomic management theory.  This has therefore lay bare the inflation targeting regime of the central bank, which it uses to control economy in terms of currency exchange rate and rate of economic growth, to criticisms by some economists as to whether it real works the magic or it is a ‘try your luck’ theory.

    Among such economists, is the Director of Research at the Institute of Economic Affairs (IEA), Dr. John Kwakye, who has expressed unhappiness with the current approach being used by the Bank of Ghana in stemming Ghana’s inflation situation.

    According to the Institute, “the inflation targeting framework being used by the Central Bank cannot provide a lasting solution to the country’s inflation problem hence must be avoided.”

    In a paper titled, “How should the bank of Ghana respond to the run-away inflation and the high cost of living in Ghana”, Dr. Kwakye argued that, “in principle, the inflation-targeting framework may be relevant in dealing with second-round inflationary effects of initial supply or cost shocks but the situation isn’t so in the Ghanaian context thereby rendering the framework less effective in stemming the country’s type of inflation.”

    In view of this, he stressed on the need for a comprehensive approach that includes direct targeting of the supply or cost elements to find a lasting solution to the rising inflation rate.

    The IEA opines that going by the principle underlying the inflation targeting, with current inflation and future outlook being so elevated, the immediate response by the BoG should be to tighten monetary policy by increasing it by 200 basis points to help narrow the gap with inflation.

    Arguably, an economist with Databank Group has indicated that, the BoG’s MPC will have tough time to arrive at their decisions in their May bimonthly review meeting. 

    “The monetary policy committee of the central bank will have a nail-biting decision to make,” Courage Martey said in an interview.  “Any attempt by the central bank to tighten monetary policy further will be an attempt to squeeze water out of stone.” 

    Mr Martey cautioned that, “Inflation hasn’t peaked yet, so the MPC would want to avoid creating a perception of chasing inflation when it should be ahead of the inflation curve.”

    However, according to an astatute financial and economic journalist who doubles as the managing editor of Economy Times newspaper, Elorm Desewu, year on year inflation is expected to worsen further in the coming months in the wake of the decision by the Public Utility Regulation Commission (PURC) to hike tariffs of electricity and water as well as increase in transport fares by the transport operators in the country. 

    Fortnight ago, the Electricity Company of Ghana and the Ghana Water Company tabled a tariff hike before the PURC awaiting approval or disapproval for consumers to pay more in access of 148 percent for power and 334 percent for water, while the transport fares have gone up by 20 percent effective last week. 

    “This is expected to impact heavily on the non-food inflation which would trigger a further rise in year on year inflation”, the journalist noted in his analysis. 

    “The current development would pose a headache to the seven member committee of the Monetary Policy Committee (MPC) as they announce their decisions of the bimonthly review of the economy today, May 23, 2022. 

    Already, the MPC has revised it medium term inflation target of 8+/-2 to March 2023.

    Additionally, the Bank of Ghana announced some measures in April this year in relation to universal banks, in attempt to anchor inflation. These include, the Cash Reserve Ratio was increased to 12 percent; the Capital Conservation Buffer was reset to the pre-pandemic level of 3 percent, making the Capital Adequacy Ratio a total of 13 percent; and the provisioning rate for loans in the Other Loans Exceptionally Mentioned (OLEM) category was reset to the pre-pandemic level of 10 percent.

    But recent figures from the Ghana Statistical Service, (GSS) depict that year on year inflation measured by the Consumer Price Index, (CPI) increased significantly to 23.6 percent for the 12-months period ended April, 2022 from 19.4 percent in March, 2022.

    According to the Ghana Statistical Service, “four divisions – transport (33.5%); household equipment and routine maintenance (28.5%); food and non-alcoholic beverages (25.6%), and housing, water, electricity, gas and other fuels (25.0%) recorded inflation rates above the national average of 23.6% with transport recording the highest inflation.”

    National month-on-month inflation from March 2022 to April 2022 was 5.1%.

    It also noted that this is the first time in 29 months that inflation for imported items exceeded domestic inflation. Whilst inflation for locally produced items was 23.0%, inflation for imported items was 24.7%.

    “The inflation for imported goods is higher than the 17.3% recorded for March 2022 while the inflation for locally produced items is 23.0% higher than the 20.0% recorded in March 2022.”

    Whilst Food and Non-Alcoholic Beverages inflation was 26.6%, Non-Food inflation stood at 21.3%.

    April 2022’s food inflation of 26.6% is higher than both food inflation for March 2022 (22.4%) and the average of the previous 12 months (13.5%).

    Food inflation’s contribution to total inflation however, decreased from 51.4% in March 2022 to 50.0% in April 2022.

    All the 15 food subclasses recorded positive month-on-month inflation with Fruit and Vegetable Juices recording the highest of 15.3%.

    Non-food year-on-year inflation on average went up again in April 2022 compared to March 2022, that is from 17.0% to 21.3%. Only one out of the 12 Non-food Divisions had the 12 months rolling average to be higher than the year-on-year inflation for April 2022 for the divisions. Transport is the Division that recorded the highest inflation in April 2022 (33.5%).

    There is a high expectation that the MPC would again hike the policy rate further to stem the rising inflation.

  • BoG shocked at rate of inflation rise…but boast of solid economy

    Adnan Adams Mohammed

    The Bank of Ghana has expressed shock at skyrocketing rise in the rate of inflation in the country.

    The central bank is however confident that the Monetary Policy Committee, which is meeting to review developments in the economy, will take a decision to see the decline of the rate of growth.  

    The MPC need to decide on the current policy rate, which stands at 17%. The policy rate, which influences interest rates for individuals and businesses, is also used as a tool to curb inflation in the country.

    “It’s an issue, which in a sense is baffling for all of us. A year ago inflation in Ghana was 7%% and now we find ourselves with high double-digit inflation. It’s a very complicated environment”, the Governor of the Bank of Ghana, Dr. Ernest Addison, said in an interview, last week.  “The MPC is meeting this week and I do not want to pre-empt what the committee will decide, but I think it’s a very complicated situation. We do need to take a position on what to do with the policy rate, which stands at 17%.”

    Data from the Ghana Statistical Service shows that the continuous surge in transport and food prices among others, across the country, has pushed the national year-on-year inflation for April 2022 to 23.6 %, which is over 13 percentage points higher than the upper band of government’s inflation target for 2022, which is 10 %.

    Under the inflation targeting regime being operated by the Central Bank, policy makers generally prefer that the policy rate stays ahead of headline inflation. But for the first time in a long while, the key rate is trailing headline inflation by about 700 basis points, leaving the Central Bank in a difficult position.

    Meanwhile, Dr. Addison has assured that he was confident the rate of inflation had peaked and should begin declining for the rest of the year.

    “Government and the Central Bank are very much aware of the problem. We’ve had very major decisions on fiscal consolidation. Expenditures have been cut by 20% among other things. We expect that these measures will serve as an anchor to inflation. A lot of the shocks that we are seeing now tend to be supply-side in nature, but we think the worst has gone through the system, and we expect that inflation will be tapering off for the rest of the year.”

    The Governor further noted that, the Ghanaian economy is growing strongly despite the threat of rising inflation and the recent sharp volatility of the cedi. 

    According to him, data secured by his outfit so far indicates that the economy continues to rebound, irrespective of the challenges. He said, the real sector of the economy has been resilient despite the impact of COVID-19 pandemic.

    “The Ghanaian situation in a sense also reflects what happened in 2020 where the government took a very expansionary stance on policy. Therefore there were many interventions that was put into place in order to protect lives and livelihoods.”

    “The impact of that was real sector being more resilient than we see in other places. As I said, we are beginning to see a pick-up in growth in 2021”, Dr. Addison emphasised.”

    Indeed, sectors such as Information, Communications and Technology; Tourism and Hospitality; Manufacturing have bounced back, registering strong growth rates.

    “Some of the data that has come in 2022 does not suggest that we are slowing down”, the Governor noted.

    “I believe, if we were to choose between growth and inflation, the policy priority should be managing the pace at which prices are increasing”, he added.

    Economy expanded by 5.4% in 2021 – GSS

    Ghana’s economy expanded by 5.4% in 2021, far higher than the 0.4% recorded in the year 2020, a period that COVID-19 pandemic had severely hit the global economy.  

    Without oil, the economy recorded a Gross Domestic Product (GDP) growth rate of 6.9%

    According to provisional estimate by the Ghana Statistical Service, only 10 countries in Africa recorded growth rates higher than that of Ghana. They included Cote d’ lvoire and Uganda.

    The strong growth rate was driven by the Services sector, particularly the Information, Communication and Technology (33.1%) and the Agriculture sector, such as Fishing (13.4%).

    The Services sector recorded the highest GDP growth rate of 9.4% in 2021.

  • Using Policy Rate to Control Inflation and Liquidity… MPC faces toughest time

    Adnan Adams Mohammed

    As the Bank of Ghana Monetary Policy Committee (MPC) is scheduled to announce its next decision on May 23 amidst historical rise in inflation to record high of 23.6 percent in more than 18 years, MPC members have one of the toughest test to pass.

    Some economists have predicted that, the MPC bimonthly review of the economy will ‘sweat’ to arrive at policy recommendations that balance its mandate to tame the unprecedented inflation spike, manage liquidity issues, and growing the economy. 

    Underscoring the dilemma the central bank faces, an economist with Institute of Economic Affairs (IEA) have suggested upwards adjustment in the policy rate by about 200 basis point to help narrow the gap with rising inflation and also ease to some extent the risk of foreign currency outflows. But, Databank research proof otherwise as it predict that, a further tightening of the Monetary Policy Rate (MPR) could stifle economic growth.

    “Any attempt by the central bank to tighten monetary policy further will be an attempt to squeeze water out of stone,” Courage Martey, an economist at Databank Group said in an interview last week. “Inflation hasn’t peaked yet, so the MPC would want to avoid creating a perception of chasing inflation when it should be ahead of the inflation curve.”

    Although, the Databank economist admits that the Committee members of the central bank will have “a nail-biting decision to make.” 

    Annual inflation jumped to 23.6%, the highest since January 2004, from 19.4% in March. As calls increase for an intervention to stem the situation, the IEA has projected a 200 basis points increase in the monetary policy rate to 19 percent. The last MPC meeting in April increased the policy rate by 250 basis points to 17%, but, Director of Research at the IEA, Dr. John Kwakye, believes the rate should see another increase to par with the current inflation rate of 23.6 percent.

    In a paper titled, ‘How should the Bank of Ghana respond to the run-away inflation and the high cost of living in Ghana?’, Dr. Kwakye asserted that, “Taking all of these factors together, it may be surmised that the PR should be raised by another 200 basis points to 19 percent.”

    “This will help narrow the gap with inflation and also ease to some extent the risk of foreign currency outflows. The adjustment will also provide some assurance to the markets that the BoG is committed to addressing the resurging inflation. Anything less than this may be interpreted as a weak response, which may be concerning to the markets.”

    According to the Institute, the factors that should determine the rate adjustment include the wide gap between the current rate of 17% and inflation rate of 23.6%; the policy tightening by major central banks, which increases the risk of foreign currency outflows from developing and emerging market economies and which could put renewed pressure on the cedi; and the increase in the policy rate by as much as 250 basis points two months ago, an increase that may not have fully exerted its impact.

    Apparently, according to the Databank’s Weekly Fixed Income Update, while it maintains an additional 200 basis hike in the policy rate in 2022, it expect the Monetary Policy Committee (MPC) to exercise restraint in May 2022, deferring a potential 100 basis points hike in MPR to July 2022.

    It expatiates that, liquidity levels are already tight on the interbank market. Real returns on fixed-income securities are also depressed with the high inflation profile, continually undermining the Treasury’s financing operations.

    “We note that short-term interest rates are misaligned, resulting in negative real yields, which could prompt the MPC to act in the week ahead”, it however pointed out.

    The first and second-round effects of petroleum and transport price hikes, elevated food prices and the lagged impact of exchange rate pass through are the main drivers of the April 2022 inflation rate. 

    “We believe these cost-push pressures will persist until the third quarter”, the investment bank stressed. Additionally, it noted that the implementation of the Electronic Transaction Levy from May 1st, 2022, and the impending hike in utility tariffs are further upside risks to inflation.

    The MPC’s regular meetings over the next three days will conclude with an announcement of a decision to either maintain, reduce or increase the policy rate today, 23rd May 2022.

    At the last meeting the policy rate which informs the rate at which the central bank lends to commercial banks which ultimately influences final interest rates was increased by 250 basis points to 17 percent to tame inflation which has so far risen by about 10 percentage points from January’s 13.9 percent to April’s 23.6 percent.

  • Rating agencies downgrades put ‘badly affected’ the cedi – BoG

    Rating agencies downgrades put ‘badly affected’ the cedi – BoG

    The Sovereign credit rating downgrades of Ghana by Fitch and Moody’s led to “widened yield spreads on both cedi-denominated government of Ghana bonds and the country’s Eurobonds”, the Bank of Ghana has said.

    “These downgrades reflect market and investor concerns about fiscal and debt sustainability”, Governor Ernest Addison told journalists last week at the Monetary Policy Committee’s 105th meeting.

    Consequently, Dr Addison said, “the Ghana cedi has come under severe pressure, as offshore investors exited positions in domestic securities at a time when domestic demand for forex has increased, reflecting both real and speculative demand”.

    This, he noted, has caused the exchange rate “to overshoot its long-term trend”.

    Dr Addison noted: “The strengthening of the US dollar, liquidity pressures, uncertainties regarding budget implementation, portfolio reversals by nonresidents and some speculative pressures are key contributory factors”.

    Moody’s Investors Service downgraded Ghana’s long-term issuer and senior unsecured debt ratings to Caa1 from B3 and changed the outlook to stable from negative.

    Moody’s said on Friday, 4 February 2022: “The downgrade to Caa1 reflects the increasingly difficult task the government faces addressing its intertwined liquidity and debt challenges”.

    “Weak revenue generation constrains government’s budget flexibility, and tight funding conditions on international markets have forced the government to rely on costly debt with shorter maturity”, Moody’s noted.

    Moody’s said its projection shows that more than half of the country’s revenue will go into the payment of interests for the next few years, and proposals by the government to fix the challenge does not seem to be feasible, especially given the fragile post-pandemic environment.

    “While Ghana’s external buffers and moderate external debt amortisation schedule in the next few years afford the government a window of opportunity to deliver on its strategy, balance of payments pressures will build up the longer government’s large financing requirements have to rely on domestic sources,” it noted.

    Apart from the long-term issuer and senior unsecured debt downgrade, Moody’s also downgraded Ghana’s bond enhanced by a partial guarantee from the International Development Association (IDA, Aaa stable) to B3 from B1, “reflecting a blended expected loss now consistent with a one-notch uplift on the issuer rating.”

    It also lowered Ghana’s local currency (LC) and foreign currency (FC) country ceiling to respectively B1 and B2 from Ba3 and B1.

    “Non-diversifiable risks are appropriately captured in an LC ceiling three notches above the sovereign rating, taking into account relatively predictable institutions and government actions, low domestic political, and geopolitical risk; balanced against a large government footprint in the economy and the financial system and current account deficits,” Moody’s said in its report.

    About a month ago, Fitch also downgraded Ghana’s Long-Term Foreign-Currency Issuer Default Rating (IDR) to ‘B-’ from ‘B’ with a negative outlook.