2 July 2014

Ghana: MPC to Maintain Policy Rate for Second Term

The Monetary Policy Committee (MPC) of the Bank of Ghana (BoG) is gearing up for its 60th regular meeting on Monday, 7 July 2014 to review developments in the economy.

As the 7-member MPC is yet to sit, economists and analysts are predicting that the committee is likely to maintain the Policy Rate at 18%. The upcoming meeting will end with a decision on the appropriate positioning of the Bank's Policy Rate. The decision of the MPC, with respect to the Bank's Policy Rate, will be announced at the press conference in Accra, the Head of Public Affairs at BoG, Esi Hammond said in a press release.

The Policy rate is the rate at which commercial banks can borrow from the central bank. It also has effect on interest rates. If the rate is increased, it will mean that all the 27 commercial banks in the country will also increase their base rates within the shortest possible time. This will automatically increase the cost of doing business in the country. If the rate is held unchanged, base rates of the various banks will remain the same.

At the last April 2014 MPC meeting to review recent global and domestic economic developments and assess risks to the outlook, the Chairman of the MPC, Dr Henry Kofi Wampah who is also the Governor of BoG, said the rate was maintained because of threats to inflation outlook .

"In assessing the outlook for inflation, the committee noted that inflation pressures have heightened driven by periodic increases in fuel and utility prices, currency depreciation and supply-demand gaps in the general economy. The bank's latest forecast shows that inflation will not return to the target band of 9.5 (+ or - 2 %) and that it would return to the target band only towards the first half of 2015.

"The risks to inflation remain high. However, the committee is of the view that the impulses from the recent monetary policy hike are still working through the system and therefore decided to maintain the policy rate at 18%," Dr. Wampah said. The central bank which recently reviewed its measures on foreign exchange operations to enhance transparency in the foreign exchange market said the analysis of data did not support the notion that the measures caused a reduction in foreign exchange inflows.

There was a decline in inflows in February but this was reversed in March 2014 in line with observed seasonal patterns. Developments in the GHS/USD exchange rates have shown that the pace of depreciation has slowed, the Head of Financial Stability Department of the BoG, Dr Benjamin Amoah explained. Monthly depreciation declined steadily from a peak of 7.8 percent in January, to 2.7 percent in May 2014. The BoG's analysis further showed that certain aspects of the new measures were constraining the businesses of exporters and importers.

Therefore, Dr Amoah indicated that there was the need to streamline these aspects in order to plug the leakages and enhance the supply of foreign exchange to the markets. Inflation which is one of considerations that the central bank always uses to determine whether the policy rate should increase, reduce, and maintain is rising.

The year-on-year inflation as measured by the CPI stood at 14.8 per cent in May 2014, up from the 14.7 per cent recorded in April 2014. This rate of inflation for May 2014 is the percentage change in the Consumer Price Index (CPI) over the twelve-month period, from May 2013 to May 2014. The monthly change rate for May 2014 was 0.9 per cent, compared to the 1.7 per cent recorded in April 2014.

According to the Ghana Statistical Service (GSS), the Food and non-alcoholic beverages group recorded a year-on-year inflation rate of 8.0 per cent. This is 1.0 percentage points higher than the 7.0 per cent recorded in April 2014. Eight subgroups of the food and non-alcoholic beverages group recorded inflation rates higher than the group's average of 8.0 per cent.

The non-food group recorded a year-on-year inflation rate of 20.0 per cent in May 2014, compared to a rate of 20.6 per cent recorded in April 2014. Two subgroups recorded year-on-year inflation rates higher than the group's average rate of 20.0 per cent. Housing, water, electricity, gas and other fuels recorded the highest rate of 51.0 per cent followed by Transport which recorded 27.0 per cent. Inflation was lowest in the Hotels. Cafes and restaurants subgroup (3.2%).

Also, from the last emergency MPC meeting to date, there haven't been any significant increased in the prices of petroleum products. So, transport fares for the period under review remained unchanged. From the above, the economists and analysts insisted that the Policy Rate would be maintained for the second consecutive time by the MPC come Wednesday, 9 July 2014.

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