Dr. Ernest Addison, BoG Governor and MPC Chair
The Monetary Policy Committee (MPC) of the Bank of Ghana (BoG) has kept the policy rate unchanged at 14.5percent.
It noted that headline inflation has remained above the upper band of the medium-term target of 8±2 percent since September 2021, adding that all the core inflation measures and inflation expectations have increased, which point to heightened underlying inflation pressures.
BoG said, following the latest forecast, inflation would likely remain above target in the near-term, driven by both external and domestic factors, and only return to target in about four-quarters ahead.
“The key risks to the inflation outlook include rising crude oil prices and its transmission to ex-pump petroleum prices and transportation costs; rising global inflation; food price uncertainties and the fiscal outlook,” it said.
“The Monetary Policy Committee envisaged this scenario when it raised the policy rate in November 2021 to contain the inherent aggregate demand pressures likely to drive prices in the outlook. The Committee is of the view that the dynamics associated with the November 2021 policy rate hike are yet to be fully transmitted and expects the decisive implementation of the fiscal correction measures, especially the 20 percent cut in expenditure to help moderate the upside risks to the inflation outlook,” it explained.
This is according to the 104th MPC press release issued by the Central Bank.
The Committee also noted that it will continue to monitor the impact of these policy measures and as needed call an extraordinary meeting to re-assess the inflation outlook over the forecast horizon and take the necessary policy decisions accordingly.
Domestic economy
It further indicated that, having assessed the domestic growth conditions of the economy, the revised quarterly Gross Domestic Product (GDP) growth numbers affirmed the strength of Ghana’s post-Covid recovery.
“All the Bank’s high frequency economic indicators have picked up significantly and currently at near pre-pandemic levels. Business sentiments are increasingly becoming optimistic and the information content derived from the Purchaser’s Managers Index, all point to some optimism among industry players,” it said.
Consumer confidence has dipped, according to the Committee, as a result of negative feedback from the considerable increase in ex-pump petroleum price adjustments in the second part of the year, as well as new tax measures announced in the context of the 2022 budget.
According to the Committee, private-sector loan growth is gradually improving, but remains negative in real terms, noting that banks are expected to keep making new advances to the economy in order to support private sector credit expansion and boost economic activity.
“The Committee expects that these favourable conditions will persist in 2022,” the Committee assured.
It said that Ghana’s sovereign bond spreads have risen dramatically, effectively closing the International Capital Markets, which has ramifications for budget funding. In response to these concerns, the government has announced a further 20 percent reduction in spending in 2022.
This fiscal policy tool, it explained, will aid in some adjustment, the avoidance of macroeconomic imbalances and the deepening of fiscal consolidation.
“This should also shift the consolidation process away from a revenue-led one, to one which encapsulates both revenue and expenditure measures, signalling stronger commitment to keeping the deficit under check,” it said.
“A steadfast implementation of the proposed measures will be needed to safeguard stability, foster credibility and re-anchor inflation expectations. The expenditure cut has been well accepted in the bond markets and decisive implementation of this fiscal correction will significantly define the outlook and mitigate the rising risk premium, as debt stabilises,” the statement further said.
Interest rates record mixed trends
On the money market, interest rates reflected mixed trends across the yield curve. The 91-day and 182-day Treasury bill rates declined to 12.49 percent and 13.19 percent respectively in December 2021, from 14.08 percent and 14.13 percent respectively, in December 2020.
Similarly, the rate on the 364- day instrument decreased marginally to 16.46 percent, from 16.98 percent over the same comparative period.
Rates on the 2-year and 5-year bonds increased to 19.75 percent and 21.00 percent respectively, from 18.50percent and 19.85 percent respectively, while rates on the 3-year, 6-year, 7-year and 10-year bonds broadly declined. The rates on the 15-year and 20-year bonds, however, remained unchanged at 19.75 percent and 20.20 percent respectively, over the same comparative period.
The weighted average interbank rate declined further to 12.68percent from 13.56percent, induced by persistent structural liquidity on the interbank market.
This transmitted to the retail end of the market, and average lending rates of banks declined marginally to 20.04percent in December 2021, from 21.20 percent recorded in the corresponding period of 2020.
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