BoG holds steady on policy rate to curb currency, inflation pressures

Monetary Policy Committee BoG
Dr. Ernest Addison, Governor of the central bank
  • maintains year-end sub-20% inflation rate projection

By Joshua Worlasi AMLANU [email protected]

The Bank of Ghana (BoG) has maintained its benchmark Monetary Policy Rate (MPR) at 29 percent following its May 2024 meeting, to anchor inflation expectations and prevent the recent cedi depreciation from becoming entrenched.

The Bank of Ghana’s Monetary Policy Committee (MPC) judged that while policy implementation aligns with the current International Monetary Fund (IMF) programme, it is important to ensure that recent developments such as sustained depreciation of the currency against its major trading partners do not become embedded into inflation expectations.

“There is need to ensure that recent depreciation of the currency does not become embedded into the pricing behaviour of businesses and on inflation expectations,” Governor Ernest Addison cautioned during remarks after the 118th MPC meeting.

However, he noted the committee views reform efforts as “consistent and aligning well with tenets of the IMF-supported programme”, and was confident that despite immediate inflation concerns the metric should close the year within earlier forecasts of less than 20 percent.

The latest inflation forecasts price growth remaining elevated but within the 13-17 percent target range by end-2024. But Dr. Addison warned that the outlook hinges on sustaining tight policy and liquidity management, given upside risks from the weaker cedi and transport fare hikes.

“The latest forecast shows a slightly elevated inflation profile on account of recent exchange rate pressures and adjustments in transportation fares. However, the projections show that inflation will remain within the monetary policy consultation clause of 13-17 percent at end of the year,” he said.

“These forecasts are contingent on sustaining the tried monetary policy stance, including aggressive liquidity management operations,” the BoG boss added.

The decision to hold rates comes despite signs of economic growth, with the Bank’s high-frequency indicators pointing to steady improvement in economic activity.

The Governor cited continued expansion in the CIEA index and firming in the Purchasing Managers’ Index driven by resilient consumer demand.

Yet private sector credit growth remains sluggish amid high raw material costs and forex pressures weighing on business and consumer confidence.

“On the contrary, real private sector credit remains generally weak, while business and consumer confidence softened – reflecting concerns about the high cost of raw materials and foreign exchange market pressures,” the Governor said.

While deeming Ghana’s external position “strong, Dr. Addison acknowledged the current account surplus nearly halved in Q1 2024 due to rebounding imports and income payments. However, he assured the domestic gold purchase programme boosts reserves, exceeding IMF programme targets.

The cedi’s slide mirrors the current account narrowing alongside robust public spending on independent power producer arrears and capital outlays, Dr. Addison explained. Speculative FX demand from importers diverting into informal markets has also applied pressure.

“The exchange rate pressures witnessed in recent weeks reflect a weakening of the current account surplus due to higher import demand and lower export revenue, especially a sharp fall in cocoa export earnings,” he said.

“The foreign exchange market pressures also reflect robust public spending on IPP arrears payment and capital expenditure outlays. There are also indications of increased pressures from importers diverting foreign exchange demand requirements into informal markets, increasing speculative demand for foreign exchange,” he further stated.

Despite the strains, the Governor insisted the Bank has ample buffers to stabilise the forex market after accumulating over US$600million in reserves year-to-date and amassing US$2.1billion in monetary gold holdings.

While expenditures outpaced revenues in the first quarter on arrears payments, Dr. Addison stressed maintaining fiscal discipline for the rest of 2024 “will be crucial to strengthen confidence in the economy”.

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