BoG maintains policy rate over inflation surge

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The Monetary Policy Committee of the Bank of Ghana has held the policy rate, as already anticipated, citing the recent upsurge in inflation as reason.

Inflation shot up to 10.6 percent in April from 7.8 percent recorded in the previous three months due to panic-buying and the mad rush for food ahead of the lockdown announcement on March 27. This drove food inflation to 14.4 percent in April 2020, 4 percentage points higher than what was recorded in the previous month.

According to Bank of Ghana Governor, Dr. Ernest Addison, the jump in inflation points to an elevated risk to the inflation outlook that may result in the rate peaking in the second quarter; hence, it is prudent to hold the policy rate at the current 14.5 percent.

“The recent rise in inflation is projected to peak in the second quarter and begin returning to the disinflation path in subsequent quarters, with inflation settling within the medium-term target band by end of the year.

“On the growth outlook, baseline projections show a sharp downturn in GDP growth, with the economy operating below capacity in the medium-term. Under the circumstances and given the balance of risks to inflation and growth, the Committee decided to keep the policy rate unchanged at 14.5 percent,” he said at a meeting with journalists in Accra.

The announcement comes as no surprise, since economic analysts had already predicted the rate would be maintained as conditions do not favour another cut after the central bank cut it by 150 basis points two months ago.

For example, Director of the Institute of Social, Statistics and Economic Research at the University of Ghana, Professor Peter Quartey, in an earlier interview with the B&FT said another cut in the rate would hurt the banking sector.

“I don’t expect the Bank of Ghana to further cut the policy rate now. When you reduce the rate, it affects the banks. At the moment, the banks have had to reduce their lending rates by 2 percentage points; and that is quite significant because it will affect their profit margins.

“The banks are also going to face loan repayment risks among others. So, I think with this the banks have already given the private sector some concessions; and therefore a further cut in the policy rate would affect their capital,” he said

Again, Data Bank Research said in a report that the rate will be held over caution on liquidity injection.

“While we view this as a temporary overshooting of the target band, we believe there is cause for caution on liquidity injection. We therefore expect the monetary policy committee to leave the MPR unchanged,” the report said.

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