BoG stays policy rate at 17% third time running …as external headwinds pose risk to inflation outlook

The Monetary Policy Committee (MPC) of the Bank of Ghana yesterday announced that it has concluded its last meeting for the year by voting to maintain the policy rate at 17 percent, due to prevailing external factors which could heighten pressure on the cedi.

Speaking at a news conference in Accra, Governor of the central bank and Chairman of the MPC, Dr. Ernest Addison, said despite inflation dropping from 9.9 percent in August to 9.8 percent in September and then to 9.5 percent in October, risks to the inflation outlook remain alive.

“Although inflation is forecasted to remain within the medium-term target band, the latest assessment shows that there are underlying pressures – including risks from the continuing escalating global trade tensions, steady rise in global inflation, further hikes in US interest rates, and a stronger US dollar.

“On the downside, the recent significant decline in crude oil prices since mid-October 2018 by about 24 percent could lower ex-pump prices and help moderate the risks going forward. In the circumstances, the Committee decided to maintain the policy rate at 17 percent,” the Governor said.

According to the Governor, the US dollar strengthening on the international market exerted pressure on currencies in emerging markets and frontier economies – including Ghana.

As at November 22, the cedi cumulatively depreciated by 7.8 percent compared with 4.6 percent in the same period last year.

The local currency has also depreciated by 3.2 percent and 3.1 percent against the pound and the euro respectively over the same period, compared with a depreciation of 11.1 percent and 14.4 percent respectively in the same period of 2017.

However, in real terms, the Governor said, the cedi remained broadly in line with the underlying fundamentals. The real effective exchange rate, in trade-weighted terms, remained within the band of ±2 percent standard deviation.

Rate actions

The policy rate began the year at 20 percent and saw a 200-basis points reduction when the Committee met in March; it was reduced to 17 percent in May, and has now been held at 17 percent in the last three meetings.

Sound banking sector

Speaking on the state of the financial system, the Governor said the sector continues to be sound, well-capitalised and resilient.

According to Dr. Addison, recent stress-tests conducted on the banking sector showed across-board improvements in the system’s resilience, even though some residual risks remain due to high NPL ratios and relatively high level of concentration of exposures in a few banks.

Other risks include related party exposures, weaknesses in some specialised deposit-taking institutions, and the high level of interconnectedness among group structures and across the various sub-sectors in the financial sector.

“On-going reforms by the Bank of Ghana, including supervisory vigilance and strict enforcement of prudential regulations, are expected to address these residual risks and restore confidence in the financial sector; and should bolster the capacity of banks to lend support to the growing Ghanaian economy,” he added.

Regarding banks’ racing to meet the minimum capital required of them by close of the year, he revealed that about 22 banks are in line to meet the December 31 deadline – with the remaining banks looking to meet it as well.

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