15 November 2012

Ghana: BoG Maintains Policy Rate At 15 Percent

The Monetary Policy Committee (MPC) of the Bank of Ghana (BoG) has decided to leave the prime rate unchanged at 15%. The policy rate is the rate at which the Central Bank does its overnight lending to the universal banks in the country.

The committee is of the view that the risks to inflation and growth are balanced and has, therefore, decided to maintain the policy rate at 15 percent.

The Acting Governor of the BoG, Dr. Henry Kofi Wampah, who is also the head of the MPC, explained to journalists in Accra that: "the committee noted that since its last meeting, global economic conditions have worsened leading to the lowering of growth projections."

The sovereign debt crisis in the euro area has persisted despite the implementation of austerity measures and refinancing packages to calm financial markets. The US 'fiscal cliff' also poses a downside risk to the global economic outlook in the coming months.

If prolonged, these global uncertainties could adversely affect the domestic economy through the trade and finance channels, he added.

On the domestic economy, the committee observed some improvement in economic trends in the third quarter of 2012, contrasting trends in the first half of the year. Price developments suggest diminished inflationary expectations as reflected in the latest surveys.

The BoG's inflation forecast indicates that inflation has been well anchored within the projected band of 8.5 ± 2 percent and is likely to end the year in single digit.

Dr. Wampah further explained: "Exchange rate pressures, which threatened macroeconomic stability and heightened inflationary pressures during the first half of the year, have eased largely as a result of the policy measures implemented".

He continued: "In the past two months, we have observed some marginal appreciation of the cedi relative to the US dollar. The reduced volatility in the foreign exchange market has helped to lower inflation expectations in the near term".

The bank's latest credit conditions survey points to easing of credit stance to households and large enterprises. The business and consumer confidence indices suggest improved sentiments on exchange rate and inflation expectations.

Credit to the private sector continued to expand providing additional impetus to economic growth. The updated Bank's Composite Index of Economic Activity (CIEA) CIEA reflected increased economic activity although at a moderate pace relative to last year, according to the MPC.

Inflation outcomes have been in line with expectations though some upside risks emanating from the external sector and fiscal operations were noted. In particular, risks to the outlook were identified as the high wage bill, arrears and fuel and utility subsidies. The Committee further observed a deterioration in the balance of payments on account of weak export growth, rising imports and short-term capital outflows.

On the growth outlook, positive developments in the CIEA, private sector credit expansion, and improved credit conditions are upside risks which could be moderated by the on-going energy sector challenges and global uncertainties.

Fiscal consolidation is crucial at this stage to preserve the resilience of the economy against these risks. We note that the arrears related to wages have been largely cleared and therefore unlikely to pose additional risks to the outlook.

Going forward, the Committee will continue to monitor the economic and financial developments and respond appropriately to preserve macroeconomic stability.

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