Bank of Ghana holds policy rate at 21 percent

The Bank of Ghana has kept rate at which it lends to commercial banks at 21 percent.

This is likely to influence the loan that borrowers who are servicing or intending to take from a Commercial Bank.

It should also give some assurances to businesses and financial institution that the economic outlook is bright.

Speaking at a news conference today, Governor of the Central Bank, Dr. Kofi Wampah says they also kept the rate unchanged also because of signs of economic pick up in coming months.

He said a committee set up to access the inflation outlook, noted that inflation which peaked in the last quarter of 2014 had begun to decline in January 2015 due to tight monetary policies and improved inflation expectation among others.

Dr Wampah noted that a latest forecast indicates that disinflation is likely to continue through 2015 to 2016.

Below is the full statement by the Bank of Ghana 

Ladies and Gentlemen of the Press, let me welcome you to the press briefing of the Monetary Policy Committee meetings held this week.  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 2014 budget and the outlook for inflation.

 Global Economic Developments
1. In the January 2015 update of the IMF’s World Economic Outlook (WEO), global growth remained unchanged at 3.3 percent in 2014 compared to 2013. However, growth is projected to pick up to 3.5 percent in 2015 and further to 3.7 percent in 2016.

2. In advanced economies, growth was lower than expected in the Euro Area and Japan. However in the US, apart from a temporary contraction at the beginning of 2014, growth was above potential and reached its fastest pace since 2003. In Emerging Markets and Developing Economies growth slowed to 4.4 percent in 2014, from 4.7 percent in 2013 reflecting cyclical factors, domestic policy tightening, and political tensions in countries such as China and Russia.

3. Sub-Saharan African growth moderated to 4.8 percent in 2014 from 5.2 percent in 2013. The pace of expansion was slow in some of the larger economies as a result of subdued global demand, soft commodity prices, weak FDI flows and infrastructure constraints. However, growth was strong in Nigeria and some of the region’s low-income countries.

4. Global inflation has remained subdued on the back of falling oil prices and weak demand. In the outlook, inflation pressures are expected to remain low due to  spare capacity, tighter policies and declining commodity prices.

5. In the international commodity markets, crude oil is projected to average US$52.8 per barrel per ounce. Gold prices are projected to average $1,276 in 2015, while cocoa is projected at about US$2,995 per tonne in 2015.

These developments will have implications for the domestic economy.

The Domestic Economy
Growth and Inflation
 6. The latest data from the Ghana Statistical Service (GSS) estimates that real GDP growth rate for 2014 was 4.2 percent, compared to 7.3 percent recorded in 2013. The deceleration in economic activity during 2014 was broadly attributed to energy supply constraints and rising input costs.

7. The Bank of Ghana’s Real Composite Index of Economic Activity (CIEA) recorded a growth of 7.9 percent year-on-year in the fourth quarter of 2014 compared with a growth of 6 percent for the same period last year. The main drivers of the improved economic activity were DMBs Credit to Private sector, SSNIT contributions and Port Activity.

 8. The results of the latest Bank of Ghana Confidence Survey conducted in January 2015 indicate that consumer sentiments continued to improve. The overall consumer confidence index increased to 89.9 in December 2014, up from 85.6 recorded in October 2014. Similarly, the business confidence index moved up to 99.2 in December from 88.7 in September.

 9. Headline inflation, which peaked at 17 percent in November and December 2014, declined to 16.4 percent in January 2015.  This reflected lower non-food inflation which fell to 23 percent in January 2015 from 24.1 percent in November 2014. However, food inflation rose to 6.9 from 6.6 percent over the same comparative period.

Monetary Developments
10. Broad money (M2+) grew by 36.8 percent year-on-year at end December 2014 to GH¢36.8 billion, compared with a growth of 19.1 percent in the corresponding period last year. This was driven largely by developments in the net domestic assets of the banking sector, on account of strong growth in domestic credit particularly to the energy sector. Reserve money also expanded by 30.1 percent in December 2014 compared to 15.1 percent in the corresponding period last year, largely driven by significant increases in the cedi equivalent of the net foreign assets of the central bank.

11. The banking industry ended 2014 on a firm note, with industry fundamentals exhibiting a positive outlook. While concentration levels improved with the top 5 banks dropping significant market shares, domestic banks continued to account for the highest number of branches. Total assets of the industry increased by 42.2 percent year-on-year to GH¢51.4 billion in December 2014 compared to a growth of 32.8 percent in December 2013. Of the total assets, gross advances constituted 46.8 percent compared with 47.1 percent a year earlier.

12. Evidence from the Bank’s survey of credit conditions continues to point to easing of credit to both enterprises and households. Small and Medium Enterprises’ (SMEs) access to credit and loans for mortgages were tightened marginally. However, access to credit for large enterprises’ remained eased.

13. In nominal terms, credit to the private sector grew by 42.1 percent in December 2014, compared to 28.6 percent in the same period last year. Real credit growth was 21.9 percent compared to 13.3 percent a year earlier. The credit growth was mainly funded by increased mobilisation of domestic deposits by the banking system.

14. The non-performing loans (NPL) ratio of the banking system, adjusted for fully provisioned loans, increased to 5.6 percent at the end of December 2014 compared with 4.6 percent in the corresponding period in 2013. However, the unadjusted NPL ratio declined to 11.3 percent from 12 percent in 2013. The capital adequacy ratio for the banking industry fell marginally to 17.9 percent in December 2014 from 18.5 percent in December 2013, but remained well above the prudential limit of 10 percent.

15.  Interest rates generally trended up on the money market during the year:

·       The rate on the 91-day instrument increased to 25.8 per cent from 19.2 percent. Similarly, the rate on the 182-day instrument increased to 26.4 percent from 18.7 percent.

·       The rate on the 1-year note rose to 22.5 percent from 17 percent, and the 2-year rate increased to 23 percent from 16.8 percent.

·       The 3-year bond rate rose to 25.5 percent from 19.2 percent.

16. The weighted average interbank rate increased to 23.7 percent from 16.3 percent in December 2013. Average lending rates of the banks rose to 29 percent from 25.6 percent in December 2013. The average rate on 3-month term deposits increased to 13.9 percent from 12.5 percent.

Government Fiscal Operations (Narrow Budget)
17. Preliminary banking data on the execution of the Government budget for 2014 indicate that total revenue and grants mobilized for the review period was equivalent to 16.6 percent of GDP, higher than the 15 percent recorded in 2013.

18. Government spending (including arrears clearance) amounted to 23.6 percent of GDP, slightly above the outlay of 23.2 percent of GDP for 2013.

19. These developments resulted in a narrow budget deficit equivalent to 7 percent of GDP. In the corresponding period of 2013, the narrow budget recorded a deficit equivalent to 8.3 percent of GDP.

20. The budget deficit was financed from both domestic and foreign sources, with the banking sector accounting for 57.7 percent while the non-bank sector financed the remaining 42.3 percent.

21. The stock of domestic debt stood at GH¢34.6 billion (30.5% of GDP) at the end of 2014, up from GH¢26.7 billion (28.4% of GDP) in 2013. External debt stood at US$13 billion (36.6% of GDP) at the end 2014, up from US$11.5 billion (26.9% of GDP) in 2013. This brings the total public debt to GH¢76.1 billion (67.1% of GDP), up from GH¢51.9 billion (55.3% of GDP) in 2013.

External Sector Developments
22. Provisional estimates for the balance of payments for 2014, recorded a deficit of US$85.2 million, a significant improvement from the US$874.2 million recorded in 2013. This was due to a marked improvement in the current account.   

23. The current account deficit narrowed by US$2.1 billion from a deficit of US$5.7 billion (11.9% of GDP) in 2013 to US$3.6 billion (9.2% of GDP) in 2014. This was driven by an improvement in the trade balance.The balance on merchandise trade improved from a deficit of US$3.8 billion (7.9% of GDP) in 2013 to US$1.6 billion (4.1% of GDP) at the end of 2014. The services, income and transfer account net recorded a deficit of US$2 billion in 2014 compared with a deficit of US$1.9 billion in 2013.

24. The capital and financial account decreased to US$3.3 billion from US$5.4 billion in 2013. This was mainly due to a US$777.2 million decrease in net inflow of official capital, a US$1.4 billion decline in short-term capital while net portfolio investments increased by US$177 million.

25. For the first month of 2015, the trade balance recorded a deficit of US$257.4 million compared to a deficit of US$231.9 million in January 2014. Exports of goods were provisionally estimated at US$900.7 million while imports were US$1.2 billion.

26. Gross foreign assets (defined as gross international reserves plus encumbered assets and petroleum funds) stood at US$4.9 billion at the end of January 2015, representing 2.9 months of imports, unchanged compared to the same period in 2014. In December 2014, gross foreign assets was US$5.5 billion, equivalent to 3.2 months of imports.

27. The cedi depreciated by 26.7 percent between January and June 2014 but remained relatively stable during the second half, depreciating by 4.5 percent. The cumulative depreciation for 2014 was 31.2 percent compared with 14.5 percent in 2013. In January 2015, the cedi depreciated by 1.3 percent compared with 7.8 percent depreciation a year ago.

Summary and Outlook
28. In assessing risks to the outlook, the Committee observed the continued vulnerability in the global environment and volatilities in the financial markets which have resulted in declining commodity prices. In particular, the declining trends in crude oil prices continue to worsen the risks facing most oil exporting economies.

29. Although the declining trend in oil prices could have a favourable effect on the balance of payments, the loss in oil related revenues would impact negatively on the national budget.

30.  The Committee observed that there was a pickup in the CIEA during the last quarter of 2014, boosted by a number of factors including DMBs credit to the private sector, SSNIT contributions and port activity. This was supported by improved sentiments and optimism by businesses and consumers as well as easing credit conditions to both enterprises and households.

31. However, the risks to the growth outlook remained tilted to the downside due to the challenges in the energy sector, expected fiscal consolidation, a tight monetary policy stance, and the adverse effects of lower international commodity prices (particularly crude oil prices).

32. These are expected to be offset by a pick-up in consumer and business sentiments, strong growth in real credit to the private sector, addition of the Atuabo Gas processing plant, and the IMF deal which will underpin investor confidence.

33. In assessing the inflation outlook, the Committee noted that inflation, which peaked in the last quarter of 2014, has begun to decline in January, 2015 on the back of tight monetary policy stance, base effects and improved inflation expectations. The Committee expressed concern about the rise in food inflation ahead of the lean season as well as the rising core inflation. However, the latest forecasts show that the disinflation is likely to continue through 2015, heading towards the target band of 8.0 ±2 percent later in 2016.

34. The upside risks to the inflation forecasts include the effects of the prolonged energy crisis through increased input costs, higher inflation expectations as well as emerging pressures in the foreign exchange market. On the downside however, the pass-through effects of the falling crude oil price, declining inflation expectations, the on-going fiscal consolidation, and a possible program with the IMF are expected to exert some downward pressure on inflation and drive inflation further down towards the target bands.

35. In view of the foregoing, the Committee judged the risks to the inflation and growth outlook as balanced and therefore maintained the monetary policy rate at 21 percent.

36. The Committee will continue to monitor developments and take appropriate actions as required.

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