Wednesday, July 15, 2015

Ghana holds rate as inflation outlook improves on cedi

    Ghana's central bank held its policy rate steady at 22.0 percent as inflationary pressures are starting to wane following the recent appreciation of the cedi currency.
    The Bank of Ghana (BOG), which raised its rate by 100 basis points in May after total hikes of 500 points last year, said inflation and inflation expectations remained high but the medium-term outlook had improved due to the central bank's "tight monetary policy stance, continuing fiscal consolidation and the recent recovery of the cedi."
    The BOG now forecasts that inflation could reach its target in the fourth quarter of 2016 instead of the previous expectation of the third quarter of 2017, but added that this still hinges on the exchange rate, oil prices and utility prices along with fiscal policy.
    The BOG, which targets inflation of 8.0 percent, plus/minus 2 percentage points, added that its decision to maintain its rate also took into account the anticipated change in U.S. monetary policy, developments in Greece and Iran along with volatile commodity prices and dampened global growth prospects.
    Ghana's inflation rate rose to 17.1 percent in June from 16.9 percent in May, largely due to the pass-through of currency depreciation.
    But the cedi has recovered strongly this month, trading at 3.46 to the U.S. dollar today, up from record lows of 4.4 last month but still down 7.8 percent from the start of the year and down 32 percent since the start of 2014.
    The BOG said it planned to merge its monetary policy rate with its reverse repo rate within the next 30 days to improve the transmission of its policy. Following the merger, it would then also launch a 7-day reverse repo instrument in the local money market and open the government's 2 year note to non-residents to improve liquidation the foreign exchange market.

    The Bank of Ghana issued the following statement:

"The Monetary Policy Committee (MPC) held its 65th meeting this week from July 13-15, 2015 to review the latest economic and financial developments.
1. The Committee decided to maintain the policy rate at 22 percent and will continue to monitor developments in the economy and take appropriate action as necessary.
The following reasons underlie the decision:
2. Inflation continued to rise since the last MPC round. Headline inflation moved up from 16.7 percent in March to 16.9 percent in May 2015. This price development is largely influenced by the pass-through of the currency depreciation and continuing cost-push inflation. Furthermore, core inflation (CPI excluding energy and utilities) continued to rise, signaling underlying inflation pressures.
3. The Committee observed that though inflation and inflation expectations were still elevated, the pressures in the outlook for the medium-term were waning. This is as a result of the tight monetary policy stance, continuing fiscal consolidation and the recent recovery of the cedi.
4. The local currency recovered strongly against the major currencies in July 2015. The cedi was trading at 4.33 to the US dollar as at June 30, 2015 (year-to-date depreciation of 26.2 %). However, as at July 14, 2015 it was trading at GH¢3.31 to the US dollar (year-to-date depreciation of 3.4%).
5. The fiscal consolidation observed since the beginning of the year has continued. For the period January-April 2015, total revenue and grants exceeded target while expenditures were broadly on target. These developments resulted in a fiscal deficit of 2 percent of GDP, within the programme target of 2.6 percent of GDP.
6. The tight monetary policy stance, evidenced by tight liquidity conditions in the banking sector has contributed to the improvement in the inflation outlook.
7. Consequently, the latest forecasts suggest that the attainment of the medium term inflation target of 8±2 percent has shifted from the third quarter of 2017 to the fourth quarter of 2016. This notwithstanding, the sources of upside risks to inflation over the forecast horizon continue to hinge on exchange rate dynamics and its implications for prices, petroleum and utility price adjustments, and fiscal impulse.
8. The stock of gross foreign assets at the end of June 2015 was $4.5 billion, enough to finance 2.9 months of imports of goods and services. Going forward, the anticipated inflows of more than US$4 billion from the Eurobond issue, syndicated cocoa financing as well as other programmed inflows in the second half of the year will provide a strong buffer and help sustain stability in the foreign exchange markets.
9. Domestic growth conditions remained vulnerable given the on-going fiscal consolidation and the impact of the energy crisis. The provisional update to the Bank’s real composite index of economic activity (CIEA) indicates a slower pace of growth during the second quarter of 2015 compared to the same period last year. Over the medium term, growth prospects remain positive, but there are potential headwinds. These include continued energy sector challenges, tight credit conditions, weak consumer confidence, and subdued commodity prices and production.
10. Recent developments in the external environment such as volatile commodity prices, dampening global growth prospects, the anticipated change in US monetary policy stance and developments in Greece and Iran pose risks to the domestic economy. The potential impact of these risks on the economy would continue to be closely monitored.
11. Developments in the banking sector showed that the industry remained sound. Aggregate capital adequacy ratio dropped marginally but remained above the statutory threshold.
12. These developments informed the decision of the Committee to keep the policy rate unchanged.
13. In addition to the policy rate decision, the MPC has mandated the Bank of Ghana to introduce additional measures to streamline monetary operations. In this regard, the following initiatives will be implemented over the next few weeks:
  • To enhance transparency in monetary operations and improve the transmission mechanism, the monetary policy rate will be merged with the reverse repo rate within 30 days.
  • The merger of the rate would be immediately followed by the introduction of a 7-day reverse repo instrument in the money market to offer more flexibility in the liquidity management of banks.
  • In order to improve liquidity in the foreign exchange market, the Bank of Ghana and the Ministry of Finance have agreed to open the 2-year Note to non-resident participation. The modalities for this are currently being worked on.
    The Bank of Ghana will engage the banks before implementation of the new measures."


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