BoG keeps policy rate over increasing debt stock, inflation

Dr. Ernest Addison, Governor Bank of Ghana

The Monetary Policy Committee (MPC) of the Central Bank has maintained the policy rate at 13.5 percent, as concerns over rising debt stock and heightened risk to inflation keep dominating the macroeconomic environment.

In a press statement released after concluding deliberations on the policy rate, the committee noted that, with public debt hitting 76.6 percent of GDP in May 2021, largely underpinned by revenue underperformance, it calls for monetary policy response that will signal to the market that government is still committed to ensuring fiscal consolidation.

And again, with an uptick in inflation to 7.8 percent in June from 7.5 percent the previous month, there is the need for further caution, especially, given pressure emanating from the fiscal side. Hence, the decision not to further cut the rate after it did so by a 100-basis points last month.

“The level of public debt raises debt sustainability concerns and the Committee reiterated the importance and urgency of fiscal consolidation efforts. Greater efficiency in debt management would be required, especially in the face of potential further tightening of global financing conditions which could heighten rollover risks and access to new financing in the outlook. This calls for strong vigilance and complementarity in fiscal and monetary policies to signal to the markets a strong commitment to consolidation.

Headline inflation has eased sharply and reverted within the medium-term target band, driven mainly by the tight monetary policy stance and some base drift effects. The latest forecast remains broadly unchanged with inflation projected to remain within band and around the central path in the forecast horizon barring any upside risks from fiscal pressures. On the whole, the Committee assessed that the risks to inflation and growth were broadly balanced and decided to keep the policy rate at 13.5 percent,” the committee’s report stated.

The committee’s decision does not come as a surprise as the International Monetary Fund (IMF) recently backed the bank to maintain tight fiscal policy should inflationary pressures persist.

“Directors agreed that the monetary policy stance remains broadly appropriate, while noting that tighter policy would be needed if inflationary pressures materialize,” the IMF stated after completing Article IV discussions with government.

Inflation expectation and heightened risk

Even though the committee said headline inflation will remain within the target band of 6-10 percent for the year, the current drivers of the inflation pose some risk to this target.

According to data from the Ghana Statistical Service (GSS), the main driver of the June inflation was the food basket which saw a 1.9 percentage point increment to record 7.3 percent in June, indicating the six-month continuous decline in food inflation has been reversed.

Among the food basket, items that recorded hike in the price levels above the average prices are milk and dairy products, tea, ready-made food, cereal products, oils and fats, fish and other seafoods, and live animals and meat. In all, food contribution to overall inflation was 41.8 percent.

Much of the rise in food prices can be attributed to higher inflation for transportation, as there was a 13 percentage points increase in transport fares in June. This resulted in transport’s contribution to inflation recording an increase of 18 percent from 16.5 percent a month earlier.

With the food prices still rising in major markets of the country, especially the capital, there is a high probability that inflation for the next few months will continue to rise, making it difficult for any cut in the policy rate.

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