The Bank of Ghana (BoG) has reduced its policy interest rate from 23.5 per cent to 22.5 per cent in response to the lowering of general price levels of goods and services across the country.
The BoG has set a target to help reduce inflation — the level at which prices change in the economy — between eight per cent, plus or minus two percentage points, in the medium term.
The Governor of the BoG, Dr Ernest Addison, was confident that the downside risks to growth outweighed the upside risks to inflation going forward and, therefore, the decision to cut the policy rate.
The policy cut reflected lower risks to inflation despite a rise in the figure to 13 per cent in April due to higher petroleum prices, Dr Addison said at a news conference in Accra organised by the Monetary Policy Committee (MPC) of the BoG.
“The committee judges that the downside risks to growth outweigh the upside risks to inflation,” he said at his first news conference since he became governor in March.
Dr Addison, who doubles as the Chairman of the MPC, said the committee had observed that headline inflation and inflation expectations had broadly trended downwards, which was supported by tight policy stance and exchange rate stability.
“With a stable outlook for exchange rate movements and return to the path of fiscal consolidation, headline inflation is expected to trend towards the medium-term target in 2018, barring any unanticipated shocks,” he stated.
The 2017 budget indicates a return to the path of fiscal consolidation. The reduction in the fiscal deficit for the year is expected to foster more stable macroeconomic conditions.
Rigorous and steadfast implementation of the budget is, therefore, critical to the outlook.
Private business growth
Dr Addison said the pace of economic activity had picked up, driven mainly by growth in private sector credit and improved business sentiments.
He said increased oil production from both Jubilee and TEN fields and the coming on stream of further activity in the oil and gas sector from the Sankofa, Gye nyame, Ntomme (SGN) fields by the third quarter should give added impetus to overall growth prospects.
“There is evidence to suggest that the economic imbalances that existed at the end of 2016 are giving way to stronger fundamentals, with economic activity expected to pick up strongly in the period ahead, although below potential,” he said.
He added that developments in the external sector pointed to significant recovery in exports over the first four months of 2017, on the back of increased production volumes and prices of gold and crude oil.
That, together with lower imports, resulted in a trade surplus estimated at 2.5 per cent of Gross Domestic Product (GDP), compared to a deficit of 2.2 per cent recorded in the same period last year.
“The volatility in the foreign exchange market observed at the last MPC meeting has eased significantly, supported by improved foreign exchange liquidity conditions and the outturn in the trade balance, with a more positive outlook based on significant expected inflows,” the governor said.
Cumulatively, the Ghana cedi depreciated by one per cent against the US dollar between January 1, 2017 and May 18, 2017, compared with 3.5 per cent reported at the last MPC round.
Gross International Reserves at the end of April 2017 increased to $6.4 billion, able to cover import bills for about 3.7 months, from $4.9 billion at the end of 2016, which was able to cover imports up to 2.8 months.