Policy rate to remain at 19%?

There are strong sentiments and optimism among financial sector players that the Monetary Policy Committee (MPC) of the Bank of Ghana will keep the policy rate at 19% as a response to recent instability in the forex market, which largely spiked inflationary pressures.

The MPC has since yesterday begun a two-day policy meeting to deliberate on developments in the economy and determine the direction of the central bank’s policy rate — which signals interest rate trends.

The last MPC meeting in July ended with the central bank nudging up the policy rate for the second time this year, from 18% to 19%, as the Bank of Ghana moved to tighten its monetary policy in a bid to control inflationary pressures due to the increase in utility tariffs and transportation costs as well as depreciation of the cedi.

In an interview with the B&FT, a number of financial sector analysts opined that recent events in the economy have built expectations that the central bank will keep its policy rate at the current 19% to prop up the currency in the face of success and oversubscription of Ghana’s third Eurobond auction and the Cocobod syndicated loan, which bring a combined value of almost US$3billion into the economy.

“I expect that it will probably stay about the same,” Pearl Esua-Mensah, Deputy Managing Director of UT Bank said.

The Chief Financial Officer of Cal Bank Philip Owiredu added: “I guess it going to stay the same. As much as they try to be able to manage rates within the country, and that (policy rate) being a key rate which gives an indication of what the direction of interest rates is going to be, I would expect they would maintain the (policy) rate as they have it now”.

The Executive Director at NDK Asset Management Limited, Collins, noted that the most prudent direction for the central bank to go is to maintain the current policy rate in order to keep the economy’s stability on track.

“They (MPC) should maintain it (policy rate). I think that for some time now interventions from the central bank have been so much, and normally when you intervene and you don’t make time for the intervention to be felt; you keep on disturbing the economy’s stability.

“The issue is the fact that inflation is going up and one might be tempted to advocate an increase in the policy rate. But I think, for some time now, all of us have come to the realisation that you have to assess the cause of that inflation; and now it is obvious that the exchange rate is a contributing factor.

“The rise in inflation is not coming from the demand side, but more because producers are being affected by the impact of the depreciating cedi and they are just increasing their prices. And since it not as a result of the fact that people have money and can spend, increasing the policy rate will not be good.

“If you also look at the fact that our exchange rate is deteriorating, going to reduce the policy rate would also not support the currency, so on that note… I think non-intervention- keep the policy rate unchanged will be the best option to go with,” he said.

The cedi — which deprecated by about 40% in the first eight months of this year — has in the last couple of weeks found support on expectation that the inflow from the Eurobond auction and the syndicated loan for cocoa purchases will shore-up the central bank’s foreign currency reserves.

Last week Thursday, government successfully raised US$1billion from the international capital market while the Cocobod signed a US$1.7billion trade finance deal with a consortium of domestic and international banks for the purchase of cocoa in the 2014/2015 crop season, with a further US$200million available for the purchase of cocoa in the light crop season.

The government’s capital mobilisation efforts took place ahead starting the much-anticipated budgetary support negotiations with the International Monetary Fund (IMF), which begin today.

The government-IMF meeting comes two months after the Finance Minister, Seth Tekper, announced that government expenditure this year has had to be increased — from GH¢35billion to GH¢36.4billion — to accommodate extra spending on energy subsidies, interest, wages and capital investments.

He also revised the budget gap to a new estimate of 8.8 percent of GDP from 8.5 percent previously.

Government is also hopeful that consumer inflation, which had increased for the 12th straight month to 15.9% at the end of August, will be reduced to 11-12 percent by the end of the year as part of a broader package of reforms to transform the economy and restore fiscal stability.

A banking industry analyst and Executive Head, School of Banking & Management at the Osei Tutu II Centre for Executive Education & Research in Kumasi, Nana Otuo Acheampong, contends that the MPC deliberations and decisions will largely take into consideration the expectations of the IMF negotiations.

“They will come out with a decision influenced by the IMF. That is my strong suspicion. Henceforth, all their dictates will be with the IMF input.

“I don’t delve into predictions but my hunch is that they (MPC) will remain status quo for now, until the IMF studies the books and comes out with its recommendations.

“My belief is that it will not change, but I will not predict anything until after the IMF comes out with their prescription; so let us wait and see what they will bring out tomorrow,” he said.

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