The Bank of Ghana (BOG) last cut its rate by 50 basis points in November 2016, the first easing since July 2011, but left it unchanged at the previous meeting of its Monetary Policy Committee in January when it noted the the positive trend toward declining inflation.
The central bank was neutral in its guidance, merely saying that it would "take appropriate action necessary towards the attainment of the inflation target."
Ghana's headline inflation rate decelerated for the fifth consecutive month in February to 13.2 percent from 17.2 percent in September 2016 while core inflation, which excludes energy and utility prices, also eased while inflation expectations by consumers, businesses and the financial sector also declined.
"These trends imply dampening underlying inflation pressures," the BOG said, adding that its latest forecasts show a downward trend towards its medium-term inflation target of 8.0 percent plus/minus 2 percentage points.
Despite an improvement in global commodity prices, Ghana's economy faces many challenges, with the fiscal deficit last year higher than targeted on expenditure overruns and revenue shortfalls.
But the central bank said its latest economic activity index had registered an uptick driven by exports, port activities and private sector credit growth while consumer and business confidence reflects positive sentiment about prospects.
Ghana's economy grew by an estimated 3.6 percent in 2016, according to the International Monetary Fund (IMF) in February, which added the decline in inflation had been slower than expected and called on the BOG to maintain "adequately tight monetary policy" to help contain possible further inflation pressures.
The fiscal deficit in 2016 was 8.7 percent of Gross Domestic Product compared with a target of 5.0 percent but the 2017 budget projects a deficit of 6.5 percent, the BOG said.
Ghana's cedi fell sharply in 2013 and 2014 while the speed of the decline slowed from mid-2015 and in the first months of this year. Since early March the cedi has appreciated, helped by a US$1 billion cedi bond and the central bank's first quarter auction of US$120 million.
The cedi was trading at 4.33 to the U.S. dollar today, down 1.2 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 75th regular MPC meetings, and I present highlights of the deliberations and the Committee’s decision on the Monetary Policy Rate.
2. Headline inflation declined for the fifth consecutive month in February 2017. Inflation fell from 17.2 percent in September 2016 to 15.4 percent in December and further down to 13.2 percent in February 2017. The steady decline in consumer prices reflected in both food and non-food prices, driven mainly by the tight monetary policy stance and some base effects.
3. Core inflation (CPI inflation excluding energy and utility prices) similarly eased over the period. Inflation expectations across all sectors, that is, consumers, businesses and the financial sector broadly declined. These trends imply dampening of underlying inflation pressures. The Bank's latest forecasts indicate a continued downward trend towards the medium term inflation target of 8±2 percent in 2018. However, upside risks to the inflation outlook remain the impact of tighter global financial conditions and volatility in commodity prices.
7. The external sector performance continues to improve. Provisional estimates of the trade account through February 2017 recorded a surplus, largely due to higher export receipts and lower non-oil imports. For the same period, gross foreign assets increased to an equivalent of 3.7 months of import cover, up from 3.5 months in December 2016.
9. In concluding, the Committee noted that underlying inflation pressures have eased considerably and inflation is projected to trend down towards the medium term target. However, there are indications that growth is likely to remain significantly below potential, which alongside an improved inflation outlook provides some scope for monetary policy easing. In addition, recent developments in inflation imply an implicit tightening. Consequently, the MPC has decided to reduce the Monetary Policy Rate by 200 basis points to 23.5 percent. The Committee will continue to monitor developments and take appropriate action necessary towards the attainment of its inflation target.
The next Monetary Policy Committee (MPC) meeting is scheduled for May 19, 2017. The meeting will conclude on May 22, 2017 with the announcement of the policy decision. "
4. Economic growth was generally modest in 2016. However, the Bank's latest update of the Composite Index of Economic Activity (CIEA) registered an uptick in year-on-year terms driven mainly by exports, port activities and private sector credit growth. In addition, the consumer and business confidence indices reflected positive sentiments about economic and industry prospects.
5. The fiscal outturn for 2016 showed a higher deficit than targeted. The overall provisional budget deficit was 8.7 percent of GDP against a target of 5.0 percent, financed mainly from domestic sources. The fiscal slippage was attributed to both expenditure overruns and revenue shortfalls. The 2017 budget has signalled a return to the path of fiscal consolidation with a projected deficit of 6.5 percent of GDP based on improved revenue mobilisation and controlled expenditures.
6. The global economy is projected to pick up moderately in 2017 driven largely by the expected fiscal stimulus in the US as well as recovery in the eurozone and emerging market economies. These projections may prompt a faster pace of monetary policy normalisation and in turn, further tightening of global financing conditions. In addition, there remains considerable uncertainty in the international commodities market. These developments could adversely impact Ghana's balance of payments, exchange rate and the inflation outlook.
8. The foreign exchange market witnessed increased pressures in the year to early March, partly attributed to a strengthening US dollar, seasonal demand factors and speculative activities. However, the observed pressures have significantly eased in recent weeks on the back of renewed confidence in the economy and improved foreign exchange inflows. As at 24th March, 2017, the Ghana cedi had cumulatively depreciated by 3.5 percent against the US dollar, significantly recovering from 8.8 percent depreciation recorded by 8th March.