MPC Press Release

EN-GB X-NONE X-NONE
Ladies and Gentlemen of the Press, Let me welcome you to the press briefing of the Monetary Policy Committee meetings held this week.

 
[1]         The Committee undertook a review of the macroeconomic situation against the background of developments in the global economy, assessment of the pace of domestic economic growth, the execution of the 2009 budget and the outlook for inflation.

 
[2]         There is evidence of modest recovery in the global economy, pushed up by the strong performance of Asian economies, particularly China and recovery in the advanced economies. The recovery was largely triggered by strong public policies that supported demand, eliminating fears of a global depression. The International Monetary Fund (IMF) has consequently revised its growth forecast for the world economy. It now projects a fall in global GDP of 1.1 percent in 2009, up from its earlier forecast of a contraction of 2.9 percent. In 2010, global GDP is forecast to grow by 3.1 percent.

 
[3]         The Monetary Policy Committee, at its meeting held last September concluded that some stabilization and consolidation, especially with respect to inflation and exchange rate expectations had begun to take hold during the second and third quarters of the year. This trend has continued into October and is likely to persist through to December 2009. This is indicative of the fact that the fiscal-monetary policy mix and corrective measures put in place to put the economy back on track are working.

 
[4]         Latest surveys conducted by the Bank of Ghana in October 2009 have confirmed earlier indications that both business and consumer sentiments continue to reflect signs of recovery. However, information derived from the Bank of Ghana's Composite Index of Economic Activity (CIEA) showed that the first three quarters of the year recorded significant slowdowns in economic activity. In the first three quarters of the year, the index recorded declines of 4.32 percent, 0.91 percent and 0.94 percent respectively. In year-on-year terms the index as at September 2009 had declined by 6.2 percent compared with a growth of 14.7 percent for the corresponding period of 2008. Construction, Port Harbour Activities, Credit to the Private Sector and Tourist arrivals all contributed to the slowdown relative to the pace observed a year ago. The decline was partially mitigated by industrial consumption of electricity by industrial concerns and exports.

 
[5]         Other indicators of economic activity that are monitored by the Central Bank such as New Vehicle Registration, Benchmark Retail Sales, Advertised Job Vacancies and Domestic VAT collections have all recorded slowdowns consistent with the direction of the composite index.

 
[6]         Data published by the Ghana Statistical Service for October 2009 show that inflation continues to decline. Inflation has been on a downward trend since it peaked at 20.7 percent in June 2009. Between June and October 2009, CPI inflation fell by 2.7 percentage points to 18.0 percent.   The fall in inflation has been driven by both non-food and food inflation. Non-Food inflation dropped by 3.2 percentage points, falling from the peak of 24.7 percent in June to 21.5 percent in October. Food inflation also dropped from the June level of 15.5 percent to 13.5 percent in October 2009.

 
[7]         The Central Bank's measure of core inflation (which excludes energy and utility items from the consumer basket) has declined by 2.1 percent between July and October 2009, recording three (3) consecutive months of decline.

 
[8]         The sharp depreciations in the foreign exchange market in the first half of the year have given way to some stabilization which has continued into the fourth quarter. The cedi continues to strengthen against the US dollar and has since August 2009 appreciated by 3.5 percent against the US dollar while recording marginal depreciations of 0.1 percent and 2.6 percent against the pound sterling and the Euro respectively.

 
[9]         Preliminary data at the Bank of Ghana on the execution of the Government budget for the year up to October 2009 show a significant reduction in the deficit on a cash basis relative to GDP compared to the same period last year.   The overall budgetary operations for the first ten months of the year resulted in a narrow cash deficit (excluding foreign financed capital expenditures) of 4.8 percent of GDP compared with 11.7 percent of GDP for the same period in 2008. The deficit was financed mostly from the domestic money market.

 
[10]      The banking system continues to be sound, well capitalised and liquid. The upside risk is the ratio of non-performing loans to total loans which increased to 13.2 percent in September 2009 from 7.6 percent for the same period in 2008. R esults from the Bank of Ghana's survey of credit conditions show that both enterprises and households continue to face tight credit conditions. Non-price terms and conditions such as shortening of the maturity of loans or credit lines, and the requirement of additional loan covenants and collaterals continued to be employed to tighten credit.  

 
[11]      Provisional data on the key monetary aggregates show a slowdown in the pace of growth of broad money and real credit to the private sector. Broad money supply (or M2+), defined to include foreign currency deposits slowed down to 25.9 percent as at September 2009, from the 38.7 percent recorded in September 2008. R eal annual growth of commercial bank credit to the private sector also slowed down significantly to 6.1 percent in September 2009, down from 32.7 per cent recorded in September 2008.

 
[12]      The external sector position continues to show improvements in the trade and current account balances. Total merchandise exports during the first   nine months of 2009 was US$ 4.2 billion, compared with US$ 4.1 billion for the same period in 2008. Exports of cocoa beans and products amounted to US$ 1.3 billion for the nine months to September 2009 compared with US$1.1 billion for 2008.

 
[13]       Total merchandise imports amounted to US$ 6.0 billion in the first nine months of the year, compared with US$ 7.8 billion for 2008 (a decline of   23.4 percent). Non-oil import for the period was US$ 4.9 billion compared with US$ 5.8 billion in 2008. Oil imports for the period was US$1.1 billion as against US$ 2.0 billion for 2008. The significant drop in the oil bill was driven mainly by lower prices and lower crude oil imports resulting from an increase in the hydro/thermal mix.

 
[14]       The merchandise trade deficit for the first nine months of the year narrowed to US$ 1.8 billion compared with US$ 3.7 billion for the same period in 2008.The current account (including official transfers) for the first nine months of the year is provisionally estimated to be in a deficit of US$ 1.0 billion compared to a deficit of US$2.7 billion for the same period in 2008.

 
[15]       The first three quarters of the year therefore registered an overall balance of payments deficit of $29.1 million compared with a deficit of $716.8 million over the same period in 2008. Gross International Reserves of the Bank of Ghana grew from US$ 2.0 billion (1.8 months of import cover) at the end of 2008 to $2.6 billion (2.5 months of import cover) at end October 2009.

 
The Outlook and Assessment of Risks.
 
[16]      To summarise, the monetary/fiscal policy framework is working and gradually placing the economy back on a path of disinflation. There are signs of stabilization in prices and in the foreign exchange market. Inflation is trending downwards and consumer price inflation has recorded four consecutive declines while core inflation is also on the decline.  

 
[17]       Indications are that inflation will continue to ease and fall within the upper part of the target range of 14.5 – 17.5 percent by the end of-December 2009. Looking ahead, inflation is likely to return to the target range of 7-11 percent by the end of December 2010. The risks to inflation are associated with the recovery of global demand and the extent to which crude oil prices might rebound. Higher crude oil prices could translate to higher domestic prices at the pump and this could result in a slightly higher inflation profile.

 
[18]      On the other hand, the Composite Index of Economic Activity suggests further slowdown in the growth of output in the economy. This is supported by the slowdown in credit to the private sector, tightness in bank credit and lower domestic VAT collections.

 
[19]      To conclude, while policies are working to enhance the disinflation process and bring inflation within the target range over the medium term, there is a need to complement the process by stemming the slowdown in output growth by appropriately positioning the policy rate.

 
[20]      In the circumstances, the Monetary Policy Committee has decided to reduce the rate by 50 basis points from 18.5 percent to 18.0 percent.