BoG to maintain policy rate

BoG to maintain policy rate

The rate-setting committee of the Bank of Ghana will most likely keep its key policy rate unchanged at 21 per cent as it prepares to announce the state of the economy in the last three months.

The Monetary Policy Committee of the central bank is expected to stay the rate in order to keep inflationary pressures at bay.

The bank is not expected to review downwards its key lending rate policy because inflationary pressures have not fully dissipated.

Apart from peaking at 17 per cent in December last year and easing to 16.4 per cent in January this year, a trend reversal is yet to be observed in the rate of inflation.

Inflation has inched up cumulatively by 20 basis points to 16.6 per cent in March, which is an indication that inflationary pressures still persist.

Despite the generally controlled outlook, economist at Databank, Mr Kingsley Courage Martey, is not anticipating reduction in the policy rate, adding, “It would undermine the gains recorded so far in anchoring inflationary expectations.”

According to Mr Martey, the resurgent crude oil price poses a risk to the inflation outlook. Since the start of April this year, the price of Brent crude has regained 24 per cent to trade above US$68 per barrel as of May 7, 2015, the highest  since December 2014.

The rebound in crude oil price is supported by a combination of geopolitical tensions in key supply regions (Saudi/Yemen and lately, Libya) and expectations of easing shale output due to lower rig counts. 

Although the market fundamentals are not robust enough to trigger a significant price upsurge, a sustained increase in crude oil price due to the speculative demand would culminate in higher transport and utility tariffs in Ghana which would exert upward pressure on non-food inflation.

“In our opinion, the latest developments on the crude oil market do not support a reduction in the policy rate as the risk to the non-food inflation outlook appears slightly higher,” Mr Martey said.

Hike not expected

An increase is also not expected because a sustained easing of pressures on the cedi depreciation would support disinflation in 2015.

“We have observed an easing of depreciation pressures since the start of April mainly due to a tight cedi liquidity on the interbank market.” 

The pace of the cedi depreciation in April was 2.7 per cent is much slower than observed for February. In February, the cedi depreciated by 6.7 per cent compared to that of March, which was 7.3 per cent.

The pace of depreciation recorded so far in May is 0.3 per cent, which is also slower than that for same period in April, which was 0.91 per cent.

Exchange rate

If the gradual slowdown in the pace of depreciation is sustained, it would support a lower inflation expectations and trigger a disinflation in 2015 without a further tightening of monetary policy.

The Bank of Ghana is also expected to restrict fiscal deficit financing in 2015 of five per cent of previous year’s revenue compared to the large-scale financing recorded in the first  and second quarter of 2014.

The tight liquidity of the cedi on the interbank market is evident in the sustained rise in the interbank interest rate and also reflects an already tightening liquidity, which does not require a further increase in the monetary policy rate.

The central bank raised the rates to 21 per cent in November last year from 19 per cent and narrowed its interest rate corridor around its main rate to 300 basis points from 500 points.

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