BoG to patch up policy rate lower

BY: Suleiman Mustapha
Dr Henry Wampah — BoG Governor

The Bank of Ghana has hinted of plans to patch up its key lending rates lower in a bid to ease the impact of its policy tightening measure when inflation is well anchored.

The Monetary Policy Committee (MPC) of the central bank last month increased its policy rate from by a 100 basis points from 25 per cent to 26 per cent in an attempt to fend off mounting inflation and ease the pressure on the local currency.

Inflation for the month of November also inched up from 17.4 per cent to 17.6 per cent fueled largely by non-food commodities.

Policy rate adjustment

The increase in the policy rate, which was the highest in 12 years, attracted the anger of business chieftains who complained  that the monetary policy tight is negatively affecting their businesses.

But the Governor of the Bank of Ghana, Dr Henry Kofi Wampah told the Graphic Business on the sidelines of an MPC news conference in Accra that the central bank is monitoring the situation and will take the appropriate action to lessen the impact when inflation is stable.

“The committee will continue to monitor developments in the economy and take appropriate action if necessary, including the possibility of lowering the policy rate once inflation expectations are well-anchored,” Dr Wampah said.

Rise in inflation

The rise in the inflation figure is an indication of the economic problems the country faces, which is following a three-year aid programme with the International Monetary Fund in an attempt to restore fiscal balance.

Fiscal consolidation, he indicated, was on track and for the first nine months of the year, the overall budget balance registered a cash deficit of 5.1 per cent of GDP, which is within the programme target of 5.7 per cent.

“Maintaining the fiscal consolidation efforts will complement the tight monetary policy stance for the attainment of the medium-term inflation target. This would in turn help create conditions for long-term sustainable growth,” Dr Wampah stated.

Inflation is expected to fall slightly to 10.1 per cent next year from an initial forecast of 11.5 per cent in 2015, according to November's budget. It will likely rise in December, however, after a sharp rise in utility prices this week. The central bank projected it will top 17 per cent this year.

 The increase in the policy rate was intended to stabilise the cedis and reduce inflation, which hit 17.6 per cent last month on the back of a lower exchange rate.

Ghana once among Africa's fastest growing economies, the gold, cocoa and oil exporter has seen slow growth due to lower global commodity prices and a fiscal crisis in which its debt-to-GDP ratio has risen to around 70 per cent.

Interest rates

“The higher interest rate should also serve to make the country less vulnerable to the adverse implications of interest rate rises,” he added.

While economists said the tightening would do little to anchor the currency in the short term, some said the move could renew investor confidence by providing evidence of the government’s commitment to fiscal consolidation demanded by the IMF.

“Having made a sizeable contribution to the financing of the deficit last year, the Bank of Ghana needed to do more to restore its anti-inflation credibility,” said  the head of African research at Standard Chartered bank in London, Miss Razia Khan,. “Unquestionably, it’s the right thing to do.”

“The key is still whether the Bank of Ghana will be able to meet the IMF targets on a consistent basis,” said Ms Khan.

Ghana's economy is expected to pick up speed next year, even as the government abides by spending limits set by the IMF.

Analysts believed the rate rise would compensate for an increase in inflation, which reached a year high in October of 17.4 per cent, pushing real interest rates high.

However, they forecast that renewed foreign-investor inflows were likely only when the exchange rate stabilises. That in turn is only likely if the government succeeds in tightening spending and expanding revenues.