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29.10.2019 Business & Finance

Price, Exchange Rate Pressures Key For Next Monetary Policy Rate

By News Desk
Price, Exchange Rate Pressures Key For Next Monetary Policy Rate
OCT 29, 2019 BUSINESS & FINANCE

The next Monetary Policy Rate (MPR) to be announced by the Bank of Ghana (BoG) in November is set to hinge keenly on how inflation and exchange rates turn out in the coming weeks, the International Monetary Fund (IMF) has indicated.

The next MPR will be effective for two months ending in late January 2020.

In statement issued, following the Fund’s staff consultation mission to Ghana last week, the IMF recommended that, “tightening monetary policy may become necessary should inflationary or exchange rate pressures emerge.”

“The monetary policy stance appears appropriate, but it should continue to remain vigilant to inflationary risks,” it noted.

In response to the IMF’s latest views – which are largely shared by BoG chieftains – economists and financial analysts are already doubting whether a reduction in the MPR, in response to lower inflation and a relatively stable cedi, will be done next month, even though the private sector is calling for it to lower borrowing costs.

Inflation for a second consecutive month in September 2019, slowed to 7.6 percent from 7.8 percent in August 2019, although the sharp fall in headline inflation during the third quarter of the year, from over nine percent during the first half of the year, is largely as a result of the recent rebasing of inflation computations.

At the last Monetary Policy Committee (MPC) meeting with the media, held in late September, the Governor of the central bank, Dr. Ernest Addison noted that the Committee’s view was that the pace of disinflation had slowed somewhat, and therefore the Committee would closely monitor the second-round effects of recent administrative measures – increases in power tariffs and fuel prices – in the last quarter.

This, along with a higher than anticipated fiscal deficit for the first seven months of 2019 led to the decision to maintain the policy rate at 16 percent — for the fourth time running – as a precautionary measure.

In an effort to curb the customary end of year cedi depreciation, the BoG began, from October 1, 2019, multiple-price forward FX auctions to further aid in finding the proper price of the currency, deepen the FX market and reduce uncertainty on the future availability of the FX to meet the FX need of the banks’ clients. Demand for FX tends to spike around the end of the year in response to higher demand to fund imports to meet the customary peak in consumerism during the year end festivities and uncertainty as to supply volumes and pricing tends to fuel cedi depreciation.

For the months of October and November, a total of US$ 50 million is being offered for each, whereas in December, the BoG intends to offer US$ 25 million.

Furthermore, the option to increase or reduce the MPR is likely to be affected by the current fiscal situation, as the deficit gap increased based on the continued revenue weakness which requires downward expenditure adjustments to contain a larger than projected budget deficit.

“This will help underpin investor confidence in the Ghanaian economy and reduce the burden on monetary policy,” the Governor said.

Importantly, economic growth remains strong – the IMF forecasts 7.0 percent this year – which reduces the need to cut interest rates to boost the growth rate.

The Fund also welcomed that the central bank’s focus on building external buffers going into 2020.

---Goldstreetbusiness.com

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