The Bank of Ghana, which has now raised its rate by 400 basis points this year, said inflationary expectations remain above its target range and to lower inflation to its medium-term target of 8.0 percent, plus/minus 2 percentage points, it had to tighten its policy or else the target horizon would be extended into 2017.
Ghana's inflation rate eased to 17.3 percent in August from 17.9 percent in July but there are upward risks to inflation from uncertainty in the foreign exchange market along with planned significant increases in utility tariffs.
The central bank said it was determined to prevent first round effects of the likely rise in prices and higher cedi liquidity in the fourth quarter from being entrenched into elevated inflation expectations.
The cedi's exchange rate has been very volatile in recent months, depreciating from January through June and then appreciating by 25 percent against the U.S. dollar in July.
In August it then deprecated by 15 percent and was trading at 4.0 to the dollar today, down 20 percent since the start of the year.
"This uncertainty in the foreign exchange market heightens inflation expectations," the bank said, adding currency volatility in coming months should moderate due to its tight policy stance and the expected inflows from the eurobond issue and the syndicated pre-export finance facility for cocoa.
The Bank of Ghana issued the following statement:
Ladies and gentlemen of the Press, let me welcome you to this Press briefing. We concluded our 66th regular MPC meetings on September 11, 2015. I present to you the policy decision that was arrived at and highlights of deliberations that informed the decision.
At the end of the deliberations, the Committee decided to increase the
monetary policy rate from 24 to 25 percent.
Since the beginning of the year, inflation pressures have persisted due
to uncertainties in the foreign exchange market, with implications for
petroleum pricing and other tradable goods and services. Inflation and
inflation expectations remain elevated and outside the medium term
target band of 8±2 percent.
Following the last MPC meeting, the Ghana Statistical Service has released three more readings of headline inflation. From 16.9 percent in May, CPI inflation increased sharply to 17.9 percent in July, mainly reflecting the upward adjustments in petroleum and transport prices. Some moderation occurred in August with inflation declining to 17.3 percent, still higher than the June reading of 17.1 percent. Core inflation (CPI excluding energy and utilities), however, continued to rise, suggesting persistent underlying inflation pressures.
The current forecasts suggest that attainment of the medium term
inflation target by the end of 2016 would require further tightening in
the monetary policy stance else the target horizon will shift into 2017.
Also, there are potential upward risks to the inflation forecast stemming
from the planned significant increases in utility tariffs. Consistent with
the attainment of the inflation target by the end of 2016 therefore, the
MPC is determined to prevent first round effects of the likely increases
in prices and the higher cedi liquidity during the fourth quarter from
being entrenched into elevated inflation expectations.
Since the previous meeting of the Committee, the volatility in the
exchange rate has continued. On month-on-month basis, the Ghana
cedi appreciated against the US dollar, in July, by 25.5 percent, and
depreciated, in August, by 14.8 percent. This uncertainty in the foreign
exchange market heightens inflation expectations. In the coming
months, however, the currency volatility is expected to moderate due
to a tight monetary policy stance and the anticipated inflows from the
Eurobond issue and the syndicated pre-export finance facility for cocoa.
Near-term domestic growth conditions continued to be adversely impacted by challenges in the energy sector, ongoing fiscal consolidation, as well as bearish external conditions. Provisional updates of the Bank’s real Composite Index of Economic Activity (CIEA) for June 2015 indicated a slower pace of growth compared with the same period in 2014. The latest surveys showed that business sentiments have softened while consumer confidence, though up, remain subdued. This notwithstanding, growth is projected to rebound in the medium term as the economy rebalances supported by increased production of oil and gas.9. The Committee also observed that the fiscal consolidation continued in the first seven months of the year, as revenues exceeded target while expenditures remained within targets. These developments resulted in a fiscal deficit of 3 percent of GDP within the program target of 4 percent. Maintaining the pace of fiscal consolidation over the medium term is necessary to complement the tight monetary policy stance for the attainment of the medium term inflation target.
10. External sector developments continued to pose significant risks to the domestic economy. The Committee was concerned about the adverse effects of elevated volatility in financial markets, uncertainty as to the timing and impact of expected tightening in the Fed’s monetary policy and declining commodity prices on the balance of payments and in turn the inflation outlook.
11. So far, export receipts have been impacted by lower commodity prices, mainly gold and oil. For the first seven months of 2015, merchandise export receipts amounted to US$6.3 billion down from US$8.1 billion in the same period last year. Merchandise imports also amounted to US$7.8 billion, from US$8.4 billion in the corresponding period in 2014 leading to a worsening in the trade deficit. However, the current account deficit improved as a result of favourable movements in the Services and Income accounts.12. Gross foreign assets as at end-July 2015 stood at US$4.4 billion, enough to cover 2.8 months of imports of goods and services compared with US$5.5 billion in December 2014 (3.8 months of imports of goods and services).13. In conclusion, the decision of the Committee to increase the policy rate is consistent with the Bank’s forecasts, which requires further tightening in order to bring inflation back within the target band by the end of 2016. The Committee will continue to monitor developments and take appropriate action if necessary."
- The current forecasts suggest that attainment of the medium term inflation target by the end of 2016 would require further tightening in the monetary policy stance else the target horizon will shift into 2017.