MPC's Policy Rate Cut Expected

Barclays says the decision by Central Bank to cut the policy rate by 100 basis points to 17% was in line with their expectations.

The rate is the lowest since November 2014.
The committee at its last meeting dropped its key lending rate by 200 basis points to 18 percent.

Speaking at a press conference, Governor of the Bank of Ghana, Dr Ernest Addison said the reduction was due to a brighter outlook for the economy.

Economic conditions showed a mixed performance
Growth in the Composite Index of Economic Activity (CIEA) slowed in real terms to 2.3% y/y in March 18 after expanding 10.9% in November 2017.

BoG sentiment surveys show continued optimism, according to the committee, despite consumer sentiment being down in April from February and business confidence up over the same period.

Private sector credit growth rose 5.6% y/y in April from 0.3% in February, while non-performing loans (NPLs) rose to 23.4% of outstanding loans versus 19.8% in April 2017.

However, the committee views the banking sector as liquid and solvent, while financial soundness indicators improved moderately.

The balance of payments deteriorated to -1.2% of GDP in Q1 18 (-$614mn) from -0.9% of GDP (-$408mn) in Q1 17 mainly due to deterioration in the capital and financial account balance.

The current account balance recorded a surplus of $255mn in Q1 (0.5% of GDP) versus $328mn (0.7% of GDP) in Q1 17. The trade surplus has weakened marginally to $1.1bn in April (year-to-date) compared with the corresponding period in 2017 as imports are rising faster than exports.

Total public debt is estimated at 60% of GDP at the end of February (GHS145bn versus GHS130.4bn in February 2017, or 64.5% of GDP).

The recent $2bn Eurobond issuance boosted gross reserves to $8.1bn or 4.4 months of import cover as at 17 May, which, according to the committee, provides enough of a cushion against any potential vulnerabilities.

Overall, while economic activity indicators point to a slower growth outcome in Q1 18, the committee expects a rebound in the medium term, supported by the favourable global environment and policy initiatives to boost growth.

Inflation
Barclays said, “The inflation outlook remains benign and we expect it to stay within single digits for the remainder of the year.”

Ghana’s exchange rate has depreciated 5% in the past week and combined with the higher oil price of above $78/bl, it may put further pressure on domestic gasoline prices and in turn, overall inflation.

“That said, we expect base effects to see overall inflation continuing to edge lower to end the year around 8.0% y/y, keeping within the target 8±2pp during the remainder of the year.

Against this backdrop, we expect further policy easing and an additional 100bp is likely in coming months. The next MPC meeting is scheduled for 18-20 July, with the rate announcement on 23 July,” Barclays’ statement said.