Economic uncertainty keeps policy rate at 14.5%


The Monetary Policy Committee (MPC) of the central bank has again, unsurprisingly, maintained the policy rate as the ravages of the coronavirus pandemic have made it impossible for the rate to be cut for the private sector to have access to more affordable loans.

Ever since the Bank of Ghana cut the policy rate by 150 basis points in March with a raft of measures to free up liquidity for the financial sector to make is possible to assist critical sectors of the economy, the policy rate has remained stale after two meetings of the MPC mainly because developments in the economy do not make it convenient to cut it further nor increase it.

Inflation, which is a key determinant of the policy rate has, since, shot up abnormally to 11.2 percent in June after remaining flat at 7.8 percent in the first quarter of the year. The local currency, after also appreciating in the first quarter, started depreciating in April till date. As of last week Friday, the cedi has depreciated by 2.5 percent against the dollar. All these indicators, coupled with the pandemic’s impact on fiscal figures, make it impossible and unwise to cut the policy rate further, hence, the Bank of Ghana’s decision to maintain it.

“The Committee noted that the COVID-19 pandemic has pushed public finances out of the path of fiscal consolidation. The fiscal deficit is estimated to expand to 11.4 percent of GDP by the close of 16 the year. The huge financing gap brought about by the expanded deficit could exert pressure on public debt, with long term implications for the economy.

The Bank of Ghana’s latest forecast shows that inflation is currently above its upper limit, driven mostly by food prices. Adjusting for the unusual noise in the food inflation, the indications are that underlying inflationary pressures are stable. The Bank projects a return of inflation to the medium-term target band by the second quarter of 2021, conditional on corrective fiscal measures being introduced in the near-term.

The Committee was of the view that the current extraordinary circumstances, with a widened budget deficit and a residual financing gap, would require some monetary restraint to preserve the anchors of macroeconomic stability. In the circumstances, the Committee decided to maintain the policy rate at 14.5 percent,” Chairman of the MPC, Dr. Ernest Addison said.

Ahead of the announcement, several analysts had predicted the outcome as they argued on the lines of uncertainties coming from the pandemic as their reasons for predicting it will neither be increased or cut.

Banking consultant, Dr. Richmond Atuahene, in an interview with the B&FT said earlier: “The policy rate will be maintained due to the uncertainty of the pandemic and the rising inflation. The underlying uncertainties surrounding the impact on both monetary and fiscal policies make it unlikely for possible reduction of policy rate in the near future.”

Risk management expert, Francis Owusu Acheampong, also said the MPC will maintain the rate due to the pandemic’s impact on the economy.

“I would expect the policy rate to be maintained. These are rough times for our economy, reeling from COVID-19. A rise in the rate may exacerbate the sluggish growth in all sectors. With continuous government borrowing to finance the budget deficit too, it may not be prudent to reduce rates as this may dampen investor expectations and make lending to the largest borrower, the government, less attractive,” he said in an earlier interview with the B&FT.

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