Bank of Ghana increases its policy rate to 22 percent

The monetary policy committee of the Bank of Ghana has increased its policy rate by a 100 basis points.

The committee increased the rate from 21 to 22 percent after meeting to review the health of the economy over the past three days. Speaking at the news conference Wednesday, governor of the Bank of Ghana, Dr. Kofi Wampah said the decision was influenced by threats to the country’ economy growth, which the Central Bank wants to control.

Read full statement

  1. Let me welcome you all to this press briefing of the Monetary Policy Committee (MPC) on the outcomes of its meetings this week.
  1. A review of the latest economic data suggests that inflation and inflation expectations are elevated with the current forecasts suggesting a further lengthening of the inflation target horizon from the second half of 2016 as indicated in the last MPC round to 2017. This development is largely driven by exchange rate pass-through, possible upward adjustment in energy and utility prices as well as cost push factors associated with the persisting energy sector challenges.
  1. In particular, inflation expectations have heightened across consumers, businesses and the financial sector, which could have implications for pricing behaviour in the immediate outlook. In addition, core inflation (CPI excluding energy and utilities) has risen which gives an indication of underlying inflation pressures.
  1. On growth, the Committee observed that challenges in the energy sector, fiscal consolidation, depreciation of the currency as well as the current high cost of doing business could weigh down on economic activity. Also, business sentiments have softened while consumer confidence, though up, remained subdued.
  1. External sector vulnerabilities also pose considerable risk to both inflation and growth. In particular, the fragile global financial conditions and continued commodity price volatility could adversely impact on reserve accumulation. Also, the anticipated increase in US interest rates could lead to capital flow reversals.
  1. It was noted that credit to the private sector was steady, while the CIEA indicated a moderate pickup in economic activity. Growth prospects in the medium term are therefore positive, especially with the coming on stream of the TEN project as well as expected improvement in the macroeconomic environment.
  2. The Committee also observed that fiscal performance in the first quarter has been encouraging with the deficit as well as central bank financing well within targets. Although the emerging consolidation constitutes a downside risk to growth, the subdued demand pressures will help to dampen inflation pressures. Sustaining the first quarter performance over the medium term is critical, and together with the tight monetary policy stance will facilitate the achievement of macroeconomic stability.
  1. Given the above considerations, the Committee concluded that risks to both inflation and growth are elevated, but tilted more to inflation. It was therefore noted that a further moderate tightening, complemented with sustained fiscal consolidation efforts could rein-in inflation and inflation expectations. Consequently, the Committee decided to increase the monetary policy rate from 21 percent to 22 percent.
  1. However, the Committee would continue to monitor the situation and take the appropriate action in consonance with the fiscal consolidation.

The above policy decision was based on the following key developments since the last meeting of the Committee.

  1. Developments in the global economy indicated that growth remained subdued in the first quarter of 2015 despite some variations across major regions. The April 2015 IMF World Economic Outlook (WEO) Update, has projected end-2015 growth at 3.5 percent, in line with earlier forecasts. Despite the first quarter growth outturn, the outlook for advanced economies is reported to be improving. In emerging and developing economies, the forecast is for slower growth, reflecting weakening domestic economic conditions in some large emerging markets and oil exporting countries with implications for commodity price trends.
  1. Sub Sahara Africa is set to register another year of strong growth, although the expansion will be at the lower end of the range. However, countries with significant exposure to global markets will need to remain cautious to avert the risk of capital flow reversals that may arise from the anticipated changes in the US monetary policy stance.
  1. Gold prices could come under some pressure in the first half of 2015 as financial markets continue to anticipate the Federal Reserve rate hikes. Prices are projected to remain within the range of US$1,180 and US$1,250 per ounce. Brent crude oil prices are expected to average $59 per barrel in 2015, with prices rising from an average of $62 in the second quarter to $67 per barrel in the fourth quarter. Cocoa prices are projected to peak in 2015 as supply weaknesses push up prices. Cocoa prices are projected to average US $3,052 per tonne in the second quarter.
  1. At the last MPC meeting, headline inflation was observed to have moved from 16.4 percent to 16.5 in February 2015. Since then, inflation has moved further to 16.6 percent in March 2015 driven by both food and non-food inflation. Food inflation picked up from 7 percent to 7.2 percent while non-food inflation moved from 23.0 percent to 23.1 percent over the same period.
  1. The latest update to the CIEA suggests a subdued pace of growth in economic activity. The real CIEA grew by 5.7 percent year-on-year in March 2015 compared to 11.1 percent in the same period last year. The key indicators that drove the index were DMBs credit to the private sector, domestic VAT collections, and port activity.
  1. The consumer and business sentiments were mixed. The overall consumer confidence index increased from 89.9 in January 2015 to 91.2 in April. However, the business confidence index dipped from 99.2 in December 2014 to 88.9 in March 2015. Both business and consumer inflation expectations went up.
  1. Preliminary fiscal data for the first quarter indicate that the fiscal consolidation efforts are on track. Revenue and grants were above target, on the back of strong growth in domestic revenue. Expenditures were below target, as the major items, including the wage bill, were contained within target. These resulted in a cash fiscal deficit equivalent to 0.6 percent of GDP, against a target of 1.9 percent.
  1. The deficit was financed mainly from external sources totaling GH¢1 billion with a domestic net repayment of GH¢278.2 million.
  1. The total public sector debt stock stood at GH¢88.2 billion at the end of March 2015, representing 65.3 percent of GDP. Of the total public debt, domestic debt constituted 41.4 per cent and external debt 58.6 per cent.
  1. Monetary developments in the first quarter of 2015 showed that broad money (M2+) growth was 31.6 percent, compared with 27.2 percent in the same period last year. This was largely driven by increased growth in all the components. Reserve money growth however declined from 28.7 percent in April 2014 to 15.7 percent in April 2015.
  1. The latest Bank of Ghana survey of credit conditions indicated an overall net tightening for all loan types. The first quarter private sector credit growth remained firm at 36.4 percent but lower than the end-2014 growth of 42.1 percent. In real terms, credit growth declined from 21.9 percent to 17 percent over the same period.
  1. Total assets in the banking sector moved from GH¢40 billion in March 2014, to GH¢55.1 billion in March 2015. The asset growth was mainly funded by deposits which recorded an annual growth of 30.8 percent to GH¢34 billion at the end of March 2015.
  1. The non-performing loans (NPL) ratio improved from 12.4 percent in March 2014 to 12.1 percent in March 2015. Adjusting for the fully provisioned loss category, the NPL ratio went up from 4.4 percent to 5.5 percent.
  2. Interest rates have broadly declined during the period. Between December 2014 and April 2015:
    1. Both the 91-day and 182-day Treasury bill rates fell from 25.8 percent and 26.4 percent to 25.1 percent and 25.8 percent respectively.
    2. The 1-year note rate remained unchanged at 22.5 percent.
    3. The 3-year bond rate fell from 25.4 to 22.5 percent, whiles the 5-year bond rate rose to 21 percent from 19.0 percent.

    The weighted average interbank rate declined marginally to 23.3 percent in April 2014, from 23.7 percent in December 2014.

    Average lending rates of the banks have remained stable at 29.0 percent in March 2015 whiles the average rate on the 3-month deposits declined to 13.0 percent in March from 13.9 percent in December 2014.

    For the first quarter of 2015, the BOP registered a deficit of US$849.4 million, compared with a deficit of US$920.7 million for the same period in 2014. The deficit was mainly due to a sharp decline in the capital and financial account whereas the current account recorded some improvement.

    1. 2The current account deficit narrowed from US$1.1 billion in the first quarter of 2014 to US$549.3 million in the same period of 2015. This was driven by an improvement in the Services, Income and Transfer account. However, the trade deficit worsened from US$215.1 million to US$446.2 million.
    1. The Capital & Financial account registered a surplus of US$54.8 million compared with US$499.5 million in 2014.
    1. The country’s gross foreign assets at the end of April 2015 stood at US$4.8 billion, representing 3.2 months of imports cover compared to US$5.2 billion for 2014 which was 3.2 months’ imports cover.
    1. Developments in the foreign exchange market indicated a further weakening of the domestic currency in 2015. From January to May 8, 2015, the cedi cumulatively depreciated by 17.2 percent against the USD, compared with 21.3 percent recorded in the same period in 2014.


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