The Monetary Policy Committee (MPC) of the Bank of Ghana (BoG) has kept its policy rate of 21 percent unchanged.
According to the Central Bank Governor, Dr. Ernest Yedu Addison, the decision was influenced by threats to economic growth and stability.
The Governor, for instance, cited the recent increases in prices of petroleum products and pick up in government’s expenditure as one of the reasons for holding the rate.
The Monetary Policy rate often influences the cost of credit in the country and guides the prices of loans. This is the second rate hold for this year by the central bank.
The next MPC meeting is scheduled for November 24, this year which will conclude on November 27, with the announcement of the policy decision.
Below is the statement from the Central Bank at a press briefing Monday:
Global growth momentum has strengthened further since the last MPC meeting, although the regional drivers of growth have shifted from the US and UK more to Japan, China and the Euro area. The much-improved prospects are driven by sustained growth in the manufacturing and services sectors, as well as a pickup in global trade. Risks to global growth are broadly balanced in the near term but medium term risks are tilted to the downside.
However, these developments are yet to translate into stronger global inflation dynamics; and monetary policy remains broadly accommodative in advanced economies. This notwithstanding, there are clear signals of a gradual return to policy normalisation. In particular, the US FED’s decision to start trimming its balance sheet from October, with a possible rate increase before the end of 2017, could trigger some tightening of global financial conditions for emerging markets in the near term.
Meanwhile, prices of Ghana’s key export commodities have recovered somewhat driven by market dynamics, policy uncertainties and rising global trade. Crude oil prices have picked up reflecting adverse effects of the recent hurricanes in the Americas, reinforcing production cuts by OPEC. However, crude oil prices are expected to remain far below their 2013 peaks. The price of gold has picked up on the back of a weak US dollar. Cocoa prices have, however, remained depressed from excess supply due to favourable weather patterns across the West African sub-region, even as demand continues to remain weak.
The combined effect of these global developments is likely to impact the Ghanaian economy through the financial and trade channels. Further strengthening of the US dollar following the recent FED’s announcement of monetary policy normalization could tighten external financing conditions. However, the strengthened commodity prices should provide some relief as Ghana’s external position continues to strengthen.
On the domestic front, economic activity continued to pick up but at a relatively moderate pace. The latest update of the Bank’s Composite Index of Economic Activity (CIEA), which tracks short-term dynamics in economic activity, indicated a growth of 3.2 percent in the year to July 2017, below the 3.9 percent growth in the same period last year.
The Bank’s latest consumer and business confidence surveys conducted in August reflected improved sentiments on the economy. These were on account of positive views expressed by businesses and consumers about exchange rate and price movements, as well as favourable prospects for industry and overall economic growth.
Broad money supply (M2+), representing total liquidity in the economy increased, driven largely by strong growth in the net foreign assets of Bank of Ghana. Comparatively, broad money supply recorded an annual growth of 28.7 percent in July 2017 against 25.9 percent a year ago.
Total outstanding credit to the private sector and public institutions grew by 14.4 percent in July 2017 compared with 17.1 percent growth in the same period last year. Of the total credit flow, the proportion of private sector was 85.1 percent.
There are initial signs of a gradual pick up in private sector credit conditions. The latest credit conditions survey conducted in August 2017 showed easing of credit stance on loans to enterprises and households, alongside increased demand for credit by enterprises. The ease in credit conditions is broadly in line with the observed gradual decline in average lending rates over the period.
There was however, a blip in the three consecutive months of declining inflation as consumer price inflation rose from 11.9 percent in July to 12.3 percent in August driven by both food and non-food prices. Similarly, the Bank’s measure of core inflation, which excludes energy and utility price changes, went up from 12.6 percent in July to 13.1 percent in August.
Despite increases in headline and core inflation, the Bank’s most recent survey which was conducted in August indicated further decline in inflation expectations across the various sectors, namely, consumers, businesses and the financial sector. The Bank’s September forecast showed that although inflation moved away from the central path on the back of new data, it will trend towards the medium-term target of 8±2 percent in early 2018, barring any unanticipated shocks.
Reforms to strengthen and re-position the financial sector as a major growth driver are on-going and banks are positively adjusting to the latest developments. Since the last MPC meeting, the Bank has revoked the licenses of two insolvent banks to safeguard the potential spillover threat on the financial sector. The roadmap towards recapitalization in accordance with the capital restoration plans set out in April has ended satisfactorily.
The Bank of Ghana is working towards building a strong and more sophisticated banking sector backed by robust capital frameworks due to increasing risk exposures. In particular, the Bank is introducing risk-based capital requirements under the Basel II and III framework as well as enhancing prudential regulations, governance structures of banks, and macro prudential oversight to support a stronger and more sophisticated financial system.
Broadly, the financial sector remains liquid and solvent although non-performing loans and concentration risks remain high. Total asset base of banks increased to GH¢89.1 billion in July 2017, representing an annual growth of 32.9 percent compared to 24.6 percent growth a year earlier. The growth in assets was funded largely by domestic deposits which went up by 32 percent on a year-on-year basis. The industry’s Capital Adequacy Ratio (CAR) averaged 14.3 percent at the end of August 2017, above the 10.0 percent statutory threshold.
Provisional data on fiscal operations indicated a cash deficit of 4.0 percent of GDP in the year to July 2017, against the set target of 4.1 percent. This outturn was on account of realised total revenue and grants of 10.3 percent of GDP, below the target of 11.9 percent. Total expenditures including arrears clearance, was 14.3 percent of GDP below the budgeted estimate of 16.0 percent.
Financing of the deficit, equivalent to 4.0 percent of GDP, was mostly from domestic sources.
Total public debt stood at GH¢138.6 billion (68.6% of GDP) at the end of June 2017 from GH¢137.3 billion (68.0% of GDP) in May 2017. Of the total, domestic debt remained unchanged at GH¢63.9 billion while external debt was GH¢74.6 billion. The marginal increase in the debt stock in cedi terms was due to exchange rate effects.
Global developments coupled with continued improvement in the macro fundamentals have impacted favourably on the country’s external position. In the year to August 2017, the trade account showed that export earnings increased significantly by approximately US$3 billion from last year, on the back of increased production volumes in gold, cocoa and crude oil. The recovery in exports combined with an estimated US$1 billion decline in imports, resulted in a trade surplus of 2.5 percent of GDP against a trade deficit of 4.3 percent recorded last year. These favourable developments would help build buffers against any unanticipated shocks.
In the first half of 2017, provisional estimates of the balance of payments reflected significant improvements. The trade surplus translated into a relatively favourable current account deficit of US$109 million (0.2% of GDP) in the first half compared with a deficit of US$1.2 billion (2.8% of GDP) in the same period of 2016. The capital and financial account also improved to US$1.3 billion (2.8% of GDP) mainly due to increased portfolio inflows from the bond issuance in April. These resulted in an overall balance of payments surplus of US$1.2 billion (2.6% of GDP) compared with a deficit of US$846 million (2% of GDP) during the same period last year.
Foreign exchange market conditions remain relatively stable supported by improved liquidity conditions, despite some marginal demand pressures. In the year to August 2017, the Ghana cedi depreciated by 4.5 percent against the US dollar, compared with a depreciation of 3.9 percent in the same period of 2016.
Gross Foreign Assets stood at US$7.1 billion, translating into 4.1 months of import cover at end August 2017, compared with US$4.9 billion (2.8 months of import cover) a year ago.
Summary and Outlook
In taking the decision, the Committee observed that improved global growth prospects and accommodative monetary policy stance in advanced economies have impacted favourably on Ghana’s external position. However, the recent signals of monetary policy normalisation could result in tight global financing conditions which may pose some balance of payments pressures in the outlook.
On the domestic front, growth prospects remain positive, although below potential. This implies that the output gap may narrow but at a much slower pace. Economic activity continues to improve supported by higher oil production volumes, positive sentiments from businesses and consumers, improvement in electricity supply, uptick in private sector credit and a number of government policy initiatives to boost agriculture and manufacturing activities. All these point to positive growth prospects in the medium term.
The fiscal consolidation process is broadly on course. Although expenditures remained within targets, the pace of spending picked up in June and July. The continued revenue underperformance could however pose some challenges to the fiscal outlook.
Headline and core inflation picked up in August, although inflation expectations declined. The Committee noted that the uptick in core inflation, an indication of emerging pressures, would require further monitoring. Since August 2017, there have been upward adjustments in ex-pump petroleum prices which are likely to transmit through prices in the coming months and pose some risks to the inflation outlook. These notwithstanding, the latest forecast show that medium-term inflation target is achievable in 2018. This forecast is contingent on continued fiscal consolidation and exchange rate stability.
The monetary policy stance has eased in line with declining inflation and underlying inflation pressures since the beginning of the year. At this MPC round however, the Committee decided it was time to pause the easing cycle in view of emerging risks to the inflation outlook, while remaining vigilant and committed to respond and take the necessary policy actions should these initial signs of underlying pressures persist.
Consequently, the Committee decided to maintain the monetary policy rate at 21 percent.