Wednesday, November 12, 2014

Ghana raises rate another 200 bps due to rising inflation

    Ghana's central bank raised its monetary policy rate by 200 basis points to 21.00 percent to maintain a tight policy stance, a surprise to most economists who had expected it to keep rates steady, with the bank saying it was concerned about the upward shift in the medium-term inflation path.
    The Bank of Ghana also realigned rates in the money market, setting the interest rate corridor at 300 basis points around the policy rate, implying that the reverse repo rate would be maintained at the current level of 24 percent and the repo rate at 18 percent.
    The central bank also cut its reserve requirement by 100 basis points to 10 percent and said it may consider further reductions when appropriate.
    The Bank of Ghana has now raised its policy rate by 500 basis points this year and the reserve requirement by a net 100 points to contain inflation.
    Ghana's headline inflation rate rose to 16.9 percent in October from 16.5 percent in September, levels not seen since 2009 when inflation topped 20 percent, due to the pass-through of the depreciation of the cedi currency that has pushed up prices of fuel, transport and imported items.
    The central bank's latest inflation forecast indicates that inflation will continue to remain outside its target band and then gradually ease towards the medium term target band of 8.0 percent, plus/minus 2 percentage points in the first half of 2016.

    However, this decline in inflation is contingent on significant fiscal consolidation and the maintenance of a tight policy stance, the central bank said, adding that in the absence of this, it could take in excess of 12 quarters for inflation to reach the target.
    The depreciation of the cedi has picked up speed since early 2013 and in the first 10 months of this year it has depreciated by a cumulative 31.2 percent against the U.S. dollar compared with a decline of 7.4 percent in the same period last year.
    The cedi hit a 2014-low of 3.82 to the dollar in mid-August and was quoted around 3.23 today, up from 3.21 prior to the rate hike.
    The deficit of Ghana's government in the first nine months of the year amounted to 6.7 billion cedi, or 5.9 percent of Gross Domestic Product, below a target of 6.4 percent. The deficit was financed with 4.7 billion cedi from external sources and 2.0 billion from domestic sources.
    Total public sector debt at the end of August was 65.7 billion cedi, or 57.3 percent of GDP, up from 55.5 percent at the end of December.
    In August Ghana's government requested support from the International Monetary Fund (IMF) and talks resumed last week, with Ghana expecting to receive some $800 in a three-year loan program.
     Ghana's gross international reserves rose by US$ 314.2 million from the end of December to $5.9 billion at the end of October and then improved further to $6.6 billion as of Nov. 7, equivalent to 3.8 months of import cover.
    Despite high inflation, Ghana's consumers and businesses are confident.
   The central bank's October survey of consumer sentiment show they were upbeat about economic conditions, with the overall index up to 85.6 from 77.5 in August and business confidence rebounded in the third quarter with the index up to 88.7 from 78.6 in the second quarter.
    Ghana's GDP expanded by 3.3 percent in the second quarter from the first for annual growth of 5.3 percent, driven by the agricultural sector, down from a rate of 6.5 percent in the first quarter.
    Ghana's statistical service projects annual growth of 6.9 percent in 2014.

    The Bank of Ghana issued the following statement:

"Ladies and Gentlemen of the media, welcome to this briefing of the 62nd regular meeting of the Monetary Policy Committee (MPC). The Committee concluded deliberations yesterday on the recent macroeconomic developments and assessed the risks to the outlook. I will present the highlights of the discussions and the decisions of the Committee.
Global Economic Developments
There have been downward revisions of global growth forecasts since the last MPC round. According to the October 2014 update of the IMF’s World Economic Outlook (WEO), world growth in the first half of 2014 was slower than expected. Global growth is now projected at 3.3 percent and 3.8 percent in 2014 and 2015 respectively, down from 3.4 and 4 percent that were projected earlier.
In the advanced economies, growth is projected to pick up faster in the US, but weak in the Euro area and Japan. In the emerging markets, growth is projected to stay subdued in Brazil and Russia but to remain high in emerging Asia, with a modest slowdown in China and a pickup in India.
Sub-Saharan Africa, on the other hand, is expected to continue growing at a fast rate, expanding by about 5.1 percent in 2014 and 2015, driven by sustained infrastructure investment, buoyant services sectors, and strong agricultural production.
Inflation generally remained below central bank targets in advanced economies, an indication that many of these economies still have substantial output gaps. In the euro area, inflation has declined further to 0.31 percent in September while inflation has remained higher but broadly stable in emerging market economies.
In the international commodity markets, crude oil is projected to average US$98 per barrel in Q4:2014 and US$84.6 per barrel in 2015. Gold prices are currently hovering just above US$1,170 per fine ounce and are projected to average $1,286 in 2015. Cocoa is trading around US$2,915 per tonne and projected to move above US$3,000 per tonne in 2015.
These developments will have implications for the domestic economy.
The Domestic Economy Growth and Inflation
Recent official data on the pace of economic activity in the second quarter confirmed the assessment based on the CIEA in the last MPC round. The Ghana Statistical Service (GSS) reported a quarter-on-quarter GDP growth of 3.3 percent in the second quarter of 2014 while year-on-year growth in the second quarter of 2014 was 5.3 percent, driven mainly by the agricultural sector. The GSS projects an annual growth rate of 6.9 percent for 2014.
An update of the Bank of Ghana’s Composite Index of Economic Activity (CIEA) for 2014:Q3 suggests a positive year-on-year growth of 7.8 percent at the end of September, 2014, compared with 9.6 percent in the corresponding period last year. The seasonally adjusted RCIEA registered a growth of 5.4 percent at the end of September 2014, compared with a growth of 8.3 percent for the corresponding period in 2013.
The Bank’s survey of consumer sentiments in October 2014 showed that consumers were upbeat about the general economic conditions. This was reflected in their responses to questions relating to current macro-economic situation, welfare issues as well as overall expectations (employment and economic activity) about key economic indicators. The overall index improved to 85.6 from 77.5 recorded in August 2014. Similarly, business confidence rebounded in the third quarter as suggested by the Bank of Ghana’s survey of Business Confidence. The index improved to 88.7 from 78.6 in the second quarter .
9. Prices on the other hand continued to rise since the last meeting as headline inflation reached 16.5 percent. This was on the backdrop of the pass-through of the depreciation of the cedi which pushed up prices of fuel, transport and imported food items. Food inflation was 5.8 percent up from the 5.1 percent recorded in August 2014 while non-food inflation was barely unchanged at 24.1 percent compared to 24.0 percent recorded in August.
Monetary Developments
Broad money (M2+) grew by 33.6 percent year-on-year at end September 2014 to GH¢32.1 billion, compared with a growth of 17.6 percent in the corresponding period last year. This was driven largely by developments in the net domestic assets of the banking sector, on account of strong growth in domestic credit particularly to the energy sector. Reserve money also expanded by 46.8 percent in October 2014 compared to 18.7 percent in the corresponding period last year, largely driven by significant increases in net foreign assets of the central bank.
The banking industry continued to grow as total assets increased by 41.0 percent year-on-year to GH¢47.8 billion in September 2014 compared to a growth of 35.4 percent to GH¢33.9 billion in the same period last year. Of the total assets, gross advances constituted 50.1 percent compared with 46.6 percent a year ago.
The latest credit conditions survey shows easing of credit to large enterprises and households. On the other hand, credit to small and medium enterprises and loans for mortgages, continued to be tightened. In terms of maturity, long term credit continued to be tightened while short term credit availability improved during the period.
In nominal terms, credit to the private sector grew by 47.5 percent in September 2014, compared to 26.6 percent in the same period last year. Real credit growth was 26.6 percent compared to 13.1 percent a year ago. The credit growth was mainly funded by increased mobilisation of domestic deposits by the banking system.
Non-performing loans (NPL) ratio, adjusted for fully provisioned loans, increased to 5.4 percent in September 2014 compared with 5.1 percent in the corresponding period last year. However, the unadjusted NPL ratio declined from 12.9 percent to 12.1 percent in the same period. The capital adequacy ratio for the banking industry fell marginally to 17.0 percent compared to 18.3 percent in the same period last year, but remained well above the prudential limit of 10 percent.
Interest rates generally trended up on the money market between December 2013 and September 2014:
The rate on the 91-day instrument increased to 25.5 per cent from 19.2 percent. Similarly, that on the 182-day instrument increased to 26.4 percent from 18.7 percent.
The rate on the 1-year note rose to 22.5 percent from 17 percent, and the rate on the 2-year increased to 23 percent from 16.8 percent.
The 3-year bond rate rose to 25.5 percent from 19.2 percent.
16. The weighted average interbank rate increased to 24.2 percent from 16.3 percent in December 2013. Average lending rates of the banks rose to 27.8 percent from 25.6 percent in December 2013. The average rate on 3-month term deposits increased to 13.5 percent from 12.5 percent.
Government Fiscal Operations
Preliminary fiscal data for January to September 2014 indicate that both revenue and expenditure were below their respective targets for the period. The shortfall in revenue was however lower than the shortfall in expenditure.
Total revenue and grants realised was GH¢17.7 billion (15.4% of GDP) falling short of the target of GH¢18.4 billion (16% of GDP). The shortfall in government receipts was partly due to lower import volumes, decline in commodity prices particularly gold in the world market, and the slowdown in economic activity arising from energy challenges.
Total expenditure, including payments made for the clearance of arrears and outstanding commitments, was GH¢24.4 billion (21.3% of GDP) compared with the budgeted ceiling of GH¢25.8 billion (22.5% of GDP). Compensation of employees summed up to GH¢7.6 billion against a budget target of GH¢8.1 billion. Interest payments also totalled GH¢4.9 billion.
As a result of these developments, the overall budget balance for the review period, registered a deficit of GH¢6.7 billion equivalent to 5.9 per cent of GDP, against a target of 6.4 per cent. The deficit was financed from external and domestic sources: GH¢4.7 billion and GH¢2 billion from external and domestic sources respectively.
21. Total public sector debt stock as at the end of August 2014 was GH¢65.7 billion (57.3% of GDP), up from 55.5 percent of GDP (GH¢51.9 billion) as at the end of December 2013. The domestic debt component as at end-August 2014 was GH¢28.5 billion (43.3% of total), while the external debt stock was US$11.9 billion (56.7% of total)
External Sector Developments
The provisional trade balance for January to September 2014 registered a deficit of US$681.3 million (1.8% of GDP) compared to a deficit of US$2.7 billion (5.6% of GDP) for the same period in 2013, as the decline in imports continue to outpace the slowdown in exports.
Total exports for the nine month period decreased from US$10.4 billion in 2013 to US$10.1 billion in the review period due to significant reductions in all our major exports except cocoa beans and products which increased by 11.4 per cent during the period to US$1.9 billion. Exports of gold of US$3.4 billion for the period, crude oil of US$2.9 billion and other non-traditional exports of US$1.9 billion recorded decreases of 9.2 per cent, 1.7 per cent and 5.1 per cent respectively.
Total imports for January to September also declined by 17.8 percent year-on- year to US$10.7 billion resulting from 22.8 per cent decline in non-oil imports partially mitigated by a 2.2 per cent increase in oil imports.
At the end of October 2014, gross international reserves stood at US$5.9 billion representing a build-up of US$314.2 million from the end of December 2013, sufficient to provide 3.4 months of import cover. This has since improved to US$6.6 billion as at November 7, 2014 equivalent to 3.8 months of import cover.
26. Developments in the foreign exchange markets indicate a generally weaker domestic currency in 2014. For the first ten months of the year, the cedi cumulatively depreciated by 31.2 percent against the US dollar in the interbank market, compared to 7.4 percent in the corresponding period last year.
Summary and Outlook
In assessing the risks to the outlook, the Committee took cognisance of the weak global economic outlook in some advanced economies, which continue to weigh down on commodity prices, especially gold and crude oil.
In the domestic economy, the Committee noted a rebound in business and consumer confidence. An update of the Bank of Ghana’s CIEA also suggests continued improvement in economic activity during the third quarter. In addition, the infrastructure for gas production has been completed and is expected to address some of the challenges in the energy sector going forward. The risk to growth in the outlook has waned on the back of strong private sector credit, near commencement of gas production and higher oil output.
Fiscal pressures however continue to pose challenges. Weak revenue performance, rising debt service costs, large public sector wage bill, and outstanding payments owed to statutory funds constitute upside risks to the expected fiscal consolidation in the medium term.
The Committee observed continued stability and improved sentiments in the foreign exchange markets. This has been supported by earlier policy measures, inflows from the Eurobond, as well as the cocoa pre-export finance facility which have increased liquidity on the markets. It is expected that a successful conclusion of ongoing negotiations with the Fund would provide some balance of payments support and may facilitate other donor flows to sustain this stability going forward.
The Committee was concerned about the outward shift in the medium term inflation path relative to the previous forecast. The latest forecast indicates that inflation would continue to remain outside the target band but expected to ease gradually towards the medium term target band of 8.0±2 percent in the first half of 2016. The ease in inflation over the policy horizon is contingent on significant fiscal consolidation and maintenance of the tight monetary policy stance. In the absence of these, the inflation target could take a longer duration in excess of twelve (12) quarters to be achieved, considering the vulnerabilities in the economy.
The Committee decided to maintain the current tight policy stance and at the same time re-align rates in the money market within the interest rate corridor.
Consequently, the Committee took the following decisions:
Set the interest rate corridor at 300 basis points around the monetary policy rate. This implies that the Reverse Repo rate would be maintained at the current level of 24 percent and the Repo rate at 18 percent.
A reduction in the cash reserve requirement by 100 basis points to 10 percent. Further reductions may be considered by the Bank of Ghana when appropriate.
Increase the monetary policy rate from 19 percent to 21 percent to ensure that the existing tight monetary policy stance is maintained whilst still operating within the corridor set by the Committee. "


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