Monday, September 19, 2016

Ghana holds rate as inflation high but pressures easing

    Ghana's central bank left its policy rate at 26.00 percent, saying inflation still remains above its target even as pressures have eased on the back of a stable cedi and tight credit conditions.
    The Bank of Ghana, which has kept its rate steady this year after raising it by 500 points in 2015 to curb inflation from a fall in the cedi's exchange rate, added that an easing in inflation since July, together with fiscal consolidation and lower growth, had contributed to an inward shift in forecast horizon to the second quarter of 2017 from the third quarter.
    The central bank noted inflation had declined from a peak of 19.2 percent in March to 16.9 percent in August but remained high compared to its target of 8.0 percent, plus/minus 2 percentage points.
   In its policy statement from July, the central bank had expected inflation to move within its target range by the third quarter of this year compared with earlier projections of mid-2017.
    "Going forward, the continued monetary and fiscal policy tightness, together with stability in the foreign exchange market should support the disinflation process," the central bank said today, adding that upside risks to the outlook come from rises in petroleum and utility prices.
     The exchange rate of Ghana's cedi has been more steady this year compared with last year and was down by 4.1 percent against the U.S. dollar as of Sept. 15 compared with a 14.8 percent depreciation in the same 2015 period.
    The central bank said it expected the exchange rate to remain stable, supported by a continued tight monetary policy, proceeds from a recently issued Eurobond, inflows from  donors and the pre-export facility for cocoa.
    Today the cedi was trading at 3.97 to the dollar, down 3.8 percent this year.

    The Bank of Ghana issued the following statement:

"1. Ladies and Gentlemen, welcome to this MPC press briefing. We have concluded our 72nd regular MPC meetings, and I present to you highlights of the deliberations and the Committee’s decision.

2. Price developments since the last MPC show that headline inflation which stood at 18.4 percent in June, declined to 16.7 percent in July, before edging up to 16.9 percent in August 2016. The slowdown in July was largely attributed to base effects from non-food inflation which fell by 2.9 percentage points to 21.2 percent while food inflation remained virtually unchanged. In August, inflation inched up, again due to base effects arising from a downward revision in petroleum products a year earlier. However, the Bank’s measure of Core inflation (CPI inflation excluding energy and utility prices), which reflects underlying inflation, continued to trend downwards. Inflation expectations by businesses, consumers and the financial sector also eased on the back of continued stability in the local currency.

3. Despite the decline from a peak of 19.2 percent in March 2016, headline inflation still remains high relative to the medium-term target band of 8±2 percent. At this MPC meeting, the inflation forecast showed a slight inward shift in the horizon to the second quarter, instead of the third quarter of 2017. Going forward, the continued monetary and fiscal policy tightness, together with stability in the foreign exchange market should support the disinflation process. The upside risks to the inflation outlook are the unanticipated shocks, especially with regards to the intermittent upward adjustments in petroleum and utility prices, and their second round effects.

4. The updated Composite Index of Economic Activity (CIEA) for July 2016 reflected an increased pace of growth relative to same period in 2015. The key indicators which contributed to the pickup in economic activity were port activities and industrial consumption of electricity. In the latest surveys, business and consumer sentiments on the economy were mixed. While consumers expressed optimism, business perceptions about the general economic situation were modest due to their unrealized expectations.

5. Growth conditions are expected to improve over the medium-term supported by the sustained improvement in the power sector and increased oil and gas production. However, the headwinds to growth include tighter fiscal consolidation, declining private sector credit and delayed recovery in commodity prices.

6. Provisional data on execution of the government budget for the first half of 2016 showed a deficit of 3.1 percent of GDP, against a target of 2.6 percent. The higher than programmed deficit was primarily driven by shortfalls from income and property taxes and oil revenue. However, government expenditures were broadly contained. The deficit was financed mostly from domestic sources that included a drawdown on government deposits with the central bank.

7. The major risks to the fiscal outlook include uncertainties in the international oil market, continued weakness in tax revenue mobilisation and wage pressures. The materialisation of these risks could slow the pace of fiscal consolidation and hinder efforts to restore macroeconomic stability. Sustaining the fiscal consolidation process is therefore critical to attaining the medium-term inflation target.

8. According to the IMF’s July World Economic Outlook, global growth prospects have weakened further following the UK vote to leave the EU. In addition to the lower growth forecasts, there are expectations of sustained low and negative interest rates across global financial markets, while the U.S. Fed inches closer to a year-end rate hike. These developments could have implications for Ghana’s balance of payments.

9. In the first half of 2016, the external trade deficit widened on account of lower export receipts, especially for crude oil. However, its overall effect on the current account balance was moderated by lower outflows from the services account. The provisional outturn of the current account balance therefore improved to a deficit of 2.6 percent of GDP, compared with 2.8 percent in the same period of 2015.

10. The local currency has been relatively stable since the beginning of the year. In the year to September 15, 2016, the Ghana cedi cumulatively depreciated by 4.1 percent compared with 16.0 percent depreciation in the same period of 2015. This was achieved on the back of tight policy stance and improved foreign exchange flows. The stability of the currency is expected to be sustained, supported by the continued policy tightness, proceeds from the recently issued Eurobond, inflows from donors and the pre-export finance facility for cocoa.

11. In assessing the current economic conditions, the Committee noted the moderation in headline inflation since the July meeting on the back of continued cedi stability, easing inflation pressures, and tight credit conditions which implicitly reflect continued monetary policy tightness. This, together with projections of tighter fiscal consolidation and lower growth, contributed to the inward shift in the forecast horizon from the third quarter to the second quarter of 2017. Despite these positive developments, the Committee observed that the current level of inflation is still high compared to the medium term target.

12.In the light of these assessments, the Committee decided to maintain the monetary policy rate at 26 percent. The Committee will continue to monitor developments in the economy and take appropriate actions, if necessary, towards attaining the medium-term inflation target over the forecast horizon.

Information Note
The next Monetary Policy Committee (MPC) meeting is scheduled for Friday, November 18, 2016. The meeting will conclude on Monday, November 21, 2016 with an announcement of the policy decision."


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