Pandemic’s new wave pushes BoG to stay policy rate again

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Dr. Ernest Addison , Governor of BoG

For the fifth consecutive time, the Monetary Policy Committee (MPC) of the Bank of Ghana has maintained the policy rate at its current rate of 14.5 percent, following risks to inflation and fiscal deficit posed by the new wave of the pandemic.

After starting year 2020 well at a stable rate of 7.8 percent for the first three months, inflation unsurprisingly ended the year at 10.4 percent following a surge in prices of goods and services in anticipation of the lockdown announcement by President Akufo-Addo during the first wave of the pandemic.

Then, fiscal deficit is projected to hit 11.4 percent of GDP at the end of 2020 as a result of increased government spending to contain the spread of the virus. This has effectively led to borrowing from both domestic and international sources, thereby, leading to total public debt hitting 74.4 percent of GDP as of November 2020.

And with the onslaught of the second wave of the pandemic on both the global and local economy, as the number of cases in the country keep soaring, recording over 4,600 from just about 300 cases in early December, there is heightened risk that fiscal deficit will see another deterioration going forward, given government will have to spend more. Hence, the MPC’s decision to maintain the rate at 14.5 percent.

“The prospects of a sharp fiscal correction in 2021 now looks unlikely amidst the second wave of the pandemic which will be requiring additional spending to provide testing, vaccines, etc. To put debt on a sustainable path and to ensure sustainability in policies, some new revenue measures and expenditure rationalization efforts will have to be pursued within the context of the medium-term fiscal framework to allow for the generation of primary surpluses.

Headline inflation, while on steady decline in the early months of the last quarter of 2020, jumped in December to 10.4 percent, outside the target band of 8±2 percent, driven by food prices. However, the Bank projects headline inflation to return to target in the second quarter of 2021. Risks to inflation in the near-term are broadly contained, but short to medium-term risks emanating from the fiscal expansion and rising crude oil prices are emerging.

Under the circumstances, and given the balance of risks to inflation and growth, the Committee decided to keep the policy rate at 14.5 percent,” the MPC statement said.

The stay in policy rate comes as no surprise as the B&FT’s analysis last week showed there is no space for the MPC to cut the rate as the macroeconomic environment does not support it. This position was corroborated by economist at the University of Ghana, Prof. John Gatsi in an interview with the B&FT last week.

“The reduction in policy rate last year didn’t match the economic indicators. It was as a result of the central bank trying to contribute to ways of managing the situation [pandemic] on the effect of borrowing by households and businesses, particularly SMEs. Therefore, you will need to contain that over a period of time. I don’t think things have changed that much to result in a reduction in the policy rate. If you want to contain the situation, then the best thing is to maintain the policy rate.

Because if you take macroeconomic indicators such as inflation, you realise it has not been stable over the period; we also do know that exchange rate is not performing as we expect it to do, especially when demand for imports have gone down, one expected that depreciation of the cedi will moderate but the exchange rate does not seem to indicate quite clearly that.

Then, if you look at expenditure, it has not moderated, especially the expenditure related to fighting the COVID-19. So for me, putting all these things together, there is no compelling reason for a policy rate reduction unless the purpose of the reduction is not linked to the usual economic indicators that we know. And which, of course, will be very costly for us because if you reduce policy rate, the indication is that, some factors are favourable and you are responding to it, when in reality they are not,” he said in an interview with the B&FT last week.

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