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The growth should be sustained

BY: Daily Graphic
Dr. Ernest Addison

Over the past one and a half years, the Bank of Ghana (BoG) has progressively eased its hitherto extremely tight monetary policy stance, seeking to balance its key inflation targeting objective with support for faster economic growth.

The Monetary Policy Rate (MPR), which is the lowest rate at which the BoG provides short-term liquidity support for commercial banks that are temporarily short of cash, has been cut by a cumulative 900 basis points (nine per cent]), from a record high 26 per cent, which was maintained for most of 2016, to 17 per cent currently.

While this has greatly favoured private sector borrowers and the financial media whose views tend to heavily influence those of corporate Ghana, the achievement of a single-digit inflation target, which was 9.6 per cent for April, is also welcome news.

This is after five years of continuous double-digit consumer price inflation, which had generated expectations of a larger MPR cut this time round than the incremental approach usually applied since the monetary easing began.

Indeed, those expectations were intensified further by the fact that April’s inflation rate marked the entry of inflation to within the central bank’s medium-term target band of eight per cent, plus or minus two per cent, for the first time since it was set in mid-2016.

 The Daily Graphic is excited that the policy rate has consistently seen a downward review in a bid to boost more credit to the private sector and spur growth.

Lowering interest rates makes borrowing more affordable, which means businesses can access loans for expansion, which will have a positive impact on job creation.

 It also triggers a boost in the bottom lines of companies listed on the stock market, which will increase dividend payout to shareholders.

Low interest rates help improve the balance sheet of banks. Non-performing loans tend to be on a decline, as consumers’ ability to pay back loans increases.

Since the BoG began its series of policy rate cuts, average lending rates of banks have dipped to about 250 basis points in the past year to 28 per cent in April, while the central bank has cut its policy rate by a cumulative 850 basis points since March last year.

The 60 basis-point drop in commercial bank lending rates in April was the largest since September last year, indicating that pass-through has improved.

This, as well as the great likelihood that inflation is close to bottoming out in the coming months, makes us believe that the BoG is close to the end of its monetary easing.

The paper has observed that the BoG seems to have prioritised keeping the policy rate stable in real terms by cutting it in tandem with the slowdown in inflation.

The risk, however, is that the acceptance of price increases as something normal keeps the country’s inflation rate structurally higher than it is in peer countries.

Ghana’s public investment in capital expenditure is already low at three per cent of gross domestic product, less than half of what Kenya has spent in recent years.

The combination of sustained infrastructure bottlenecks and the high acceptance of price increases, therefore, is likely to keep the country’s inflation rate higher than that of our peers over the medium term .

We thus urge the central bank to put in measures that will compensate for the likelihood of this otherwise good economic environment impairing the country’s competitiveness and reducing investment.