Why BoG will maintain policy rate at 26%
The Bank of Ghana (BoG) is likely to maintain its policy rate at 26 per cent for the last quarter of the year, when the Monetary Policy Committee (MPC) concludes its 72nd meeting and monetary policy review of the economy.
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The MPC is scheduled to start meeting from September 16 to review the economy for the last quarter and make projections into the rest of the year. The meeting will end with the announcement of a policy decision on its policy tool, the policy rate, on September 19.
The holding of the rate would be consistent with a number of factors, including the need to keep the taps on inflationary pressures and sustain the renewed optimism in the banking sector, while warding off the cyclical pressures emanating from the political economy cycle.
Although inflation, which is a key determinant in setting the policy rate, has dropped from 18.4 per cent in June to 16.7 per cent in July, the one-off decline within the third quarter would not be encouraging enough to warrant a reduction in the policy rate.
It, however, provides some space for the MPC and the BoG in general to manoeuvre on the slippery rope of balancing the need to rein in the real and anticipated fiscal pressures in the economy with the need to stimulate growth in an election year.
Trends
It has been 14 years since BoG introduced the Policy Rate as a central part of its inflation targeting (IT) framework.
Over the period, MPC, which sets the rate on quarterly basis after reviewing economic activities, has adjusted it 30 times in line with anticipated inflationary pressures and as a signal to the business and investor community on the direction the BoG expects inflation to go.
From 25.5 per cent in 2002, the rate peaked at 27.5 per cent in May 2003 before easing to 12.50 per cent in August 2007. Thereafter, it continued on the upward trajectory; peaking at 18.5 per cent in September 2009 before sliding consistently to 12.5 per cent in December 2011.
It then resumed an upward trajectory; rising to 16 per cent in November 2013 and 21 per cent in November 2014 before settling at the current 26 per cent since November, last year.
Expenditure pressures
Since the committee maintained the rate at 26 per cent in July, this year, some risks to monetary and fiscal targets have moderated with some elevating as the country inches closer to the crucial December 2016 general elections.
One of them is the lingering concerns over fiscal indiscipline, which are premised on developments in previous election years.
In those years, government expenditures always remained steady in the first nine-to-10 months of the year only to firm up in the last two-to-three months, similar to what is currently happening.
In 2008 and 2012, for instance, public expenditures were well within budget until about October, when they started drifting apart and finally ended those election years at 11.2 per cent and 11.9 per cent, well above their respective budget targets of 5.7 per cent and 6.7 per cent.
With the main opposition New Patriotic Party (NPP) set to take on the ruling National Democratic Congress (NDC) in a contest that will redefine the political careers of the two leaders – President John Dramani Mahama and his contender Nana Akuffo Addo – concerns over the credibility of budget targets after the elections have heightened.
Thus, maintaining the policy rate would be a perfect cushion, albeit inadequate, to whatever effects that fiscal indiscipline in the course of the year would trigger.
This is because the fiscal side, in its current state, presents a real threat to the entire performance of the economy and efforts aimed at reducing that pain would be welcoming.
Election year headwinds
The bet on the rate remaining the same is also premised on the strong historical headwinds that have characterised the BoG setting the policy rate in all election years, beginning with the one in 2004.
Despite the undulating nature of the policy rate, which is now the benchmark for the setting of interest rates by the commercial banks, a cursory look shows that it mostly enjoys some stability or modest adjustments in election years.
At its current rate of 26 per cent, which is the fifth time that it was left unchanged, the stability in the policy rate only rivals what occurred in 2004, when it was maintained at 18.5 per cent for five consecutive times, starting from May 2004 to March, 2005.
In 2008, it was increased from 14.25 per cent in March to 16 per cent in May before being maintained at 17 per cent until October, the same year.
In 2012 too, the rate was raised only from 14.5 per cent in April to 15 per cent in June. Thereafter, it was maintained for four consecutive times until May 2013.
While the economic conditions that motivated the stability in the policy rate in all the three elections are different, it is obvious that the BoG prefers rate-holds in election years to adjustments.
This is obvious due to the delicate nature of the bank's mandate in those years – igniting growth in the midst of anxiety.
The same dilemma would stare at the faces of the committee members, headed by the Central Bank Governor, Dr Abdul-Nashiru Issahaku, when they begin their 72nd sitting.
Exceptions
Despite the strong bet on a rate hold, some exceptions remain. They include Dr Issahaku being new at the helm of affairs at the BoG.
Despite being a member of the MPC for about three years, having been a second deputy Governor until March this year, it is still too early to be able to fully appreciate the direction of his policy decisions.
He comes across as a practical person who would not mind sacrificing theories to achieve results.
It should therefore not come as a surprise if the committee decides to make a 50 basis points adjustment to either excite business confidence or ignite growth (in the case of a reduction), or refocus pressure on fiscal concerns and push back inflationary pressures, in the case of a hike.
Whatever the case, holding the rate constant would still be in the best interest of the economy, considering the current circumstances.
