Bank of Ghana Faces Uphill Task in Checking Cedi, Inflation Pressures 

Governor of Bank of Ghana, Dr. Ernest Addison

Accra, Ghana, March 28, 2019//-As the Bank of Ghana’s(BoG) Monetary Policy Committee (MPC) holds its 87th meeting to review recent developments in Ghana’s economy, one major task the Committee faces is to effectively reverse the path of the depreciating cedi while maintaining inflation at a single digit and at the same time keeping interest rates low.

Recently, these two indicators,which have strong correlations with the rate at which the central bank lends to commercial banks,saw upward movements following the BoG’s decision to reduce its policy rate by 100 basis point to 16 per cent in January 2019.

“After the decision, the exchange rate and inflation both increased, a proof that the committee may have gotten it wrong in reducing the policy rate,” Economic Analyst at GN Research, Emmanuel Zewu said via text. “This is expected to occupy the minds of the Committee members and they may not opt for a cut in the policy rate but are likely to keep the rate at 16 per cent.”

Indeed, within a period of ten months, from March 2018 to January 2019, the BoG has reduced its policy rate by some 400 basis points to its current 16 per cent from 20 per cent.

At the last MPC meeting, Governor of the BoG, Ernest Addison said the move was “influenced by a fairly stable outlook for the economy.”

However, both inflation rate and the cedi’s value have been fairly unstable recently.

Inflation rose by 0.2 percentage points to 9.2 per cent in February 2019 from 9.0 per cent in January 2019, having improved from a December 2018 inflation of 9.4 per cent.

The cedi also took a nose-dive in the second week of February 2019 to record an alarming 13.57 per cent depreciation by mid-March after opening the year trading at GH₵4.9175 to a dollar, according to the Bloomberg Terminal.

It took an announcement by the Finance Minister, Mr Ken Ofori-Atta, that a total of $4.6 billion would be injected into the system before the second quarter of this year to rescue the cedi from its plummet.

But the appreciation of the local currency has been unsteady as it has been fuelled purely by speculations and not long-term solutions to firm it up against major trading currencies, analysts have explained.

“I believe that, the performance of the cedi after the successful issuance of the Eurobond should not play a major role in the decision of the MPC.  This is because, the effect will be short lived,” Zewu said.

He said had the banking sector fully recovered from the recent clean-up exercise by the BoG, a change in the policy rate could effectively result in positive changes in the economy but the situation was not so.

“The banking sector continue to adjust after the clean-up exercise by the central bank. This means that the main channel of transmission of the decisions of the MPC may not be in a position to effectively transmit any changes in the policy rate.

“Therefore, if the MPC decides to maintain the policy rate, it will serve the central bank well in its quest to ensure a stronger link among commercial banks’ interest rates, the reference rate, the policy rate and inflation.”

Zewu indicated it would be the strongest statement about the central bank’s seriousness if it increased the policy rate. But given that the recent $3 billion bond issuance has managed expectations and speculations in the interim, the MPC might not want to distort the current trajectory.

“Also given governments will to bring interest rates down do ensure success of its programs and the fact the monetary policies largely turn to accommodate fiscal policies, the likely decision will be to maintain the rate.”


The writer is an economic and financial journalist based in Accra.


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