Ghana holds rate to deepen FX gain, boost disinflation

    Ghana's central bank left its policy rate unchanged at 26.0 percent, the second highest policy rate worldwide, saying "the tight policy stance is needed to deepen the gains made in the foreign exchange market and strengthen the disinflation process over the forecast horizon."
    The Bank of Ghana, which has maintained its rate this year after raising it by 500 basis points in 2015 to curb inflation from a plunge in the cedi's exchange rate, added the risks to inflation and growth were seen as balanced and the tight policy stance and stability in the foreign exchange market, alongside easing inflation expectations and improving fundamentals, should provide additional momentum to the disinflation process.
    A deceleration in the inflation rate in April was in line with the central bank's earlier forecast that inflation would peak in the first quarter of this year and then decline.
   The latest forecasts reinforce the view that inflation will gradually decline from the second quarter towards the medium-term target band of 8.0 percent, plus/minus 2 percentage points.
    In April Ghana's headline inflation rate eased to 18.7 percent from 19.2 percent in March due to a slowdown in non-food inflation and a stable exchange rate. The latest surveys from April show declining trends in inflation expectations based on positive perceptions of exchange rate movements and improved energy supply, the bank said.
    Since October last year the cedi's exchange rate has been stable, with the central bank attributing this to past rate hikes, improved liquidity on foreign exchange markets and investor interest in debt.
    Today the cedi was quoted at 3.83 to the U.S. dollar, steady from 3.82 at the start of this year but down 16.7 percent since the start of 2015.
    The fiscal operations of Ghana's government from last year through the first quarter of this year showed a faster pace of consolidation than projected, the central bank said.
    The deficit of Ghana's government was estimated to have declined to 6.7 percent of Gross Domestic Product in 2015, lower than the targeted 7.3 percent and down from 10.4 percent of 2014.
    Fo the first quarter of this year, the deficit on a cash basis was estimated at 0.4 percent of GDP compared with a 1.5 percent target, the bank added.





    The Bank of Ghana issued the following statement:
   

1. "Ladies and Gentlemen, welcome to this MPC press briefing. We have concluded our 70th regular MPC meetings, and I present to you the Committee’s decision and highlights of the deliberations.
   
2. The Committee has decided to maintain the monetary policy rate at 26 percent.
   
3. Since the last meeting of the Committee, there have been two readings of inflation. Headline inflation rose to 19.2 percent in March, from 18.5 percent in February. The sharp increase in March was largely influenced by the lagged effect of the upward adjustment in transport costs. In April, however, inflation declined to 18.7 percent following a slowdown in non-food inflation. The monthly inflation rates also slowed, supported by stability in the exchange rate.
   
4. Similarly, core inflation (CPI inflation excluding energy and utility prices) picked up in March largely due to the higher transport costs, but has since returned to a declining path. In addition, the latest surveys of businesses, consumers and the financial sector conducted in April reflect declining trends in inflation expectations based on positive perceptions about exchange rate movements and improved energy supply.
   5. Recent developments in prices remain in line with our earlier forecasts that inflation will peak in the first quarter of 2016 and decline thereafter supported by continued policy tightness and stability in the local currency. The latest forecast reinforces the earlier forecasts that inflation will gradually decline from the second quarter towards the target band by mid-2017, barring any unanticipated shocks.
      
   6. In the near term, the tight policy stance and stability on the foreign exchange market alongside easing inflation expectations, and generally improving fundamentals should provide additional momentum to the disinflation process over the forecast horizon. The MPC therefore views the current monetary policy stance as appropriate since inflation levels remain above the medium term target band of 8±2 percent.
      
   7. There are however risks in the inflation outlook. These include unanticipated upward adjustments in utilities and petroleum product prices and possible second round effects from such adjustments on prices. The slow but persistent pickup in food inflation, since August 2014, is also a source of concern for inflation.
      
   8. The updated Composite Index of Economic Activity (CIEA) indicated a pick-up in economic activity in the first quarter of 2016, although at a slower pace than a year ago. Indicators that accounted for the growth in the index were industrial consumption of electricity, port activities, cement sales and domestic VAT collections. In addition, the recent confidence surveys for both businesses and consumers reflect positive sentiments supported by relative stability in the cedi and significant improvement in electricity supply.
      9. The growth outlook is broadly positive contingent on sustained improvements in the energy supply, continued stability in the local currency and additional oil and gas production. However, risks such as tight credit conditions and continued tightness in the fiscal stance may moderate the pace of economic activity.
         
      10. Government fiscal operations from 2015 through to the first quarter of 2016 showed faster pace of consolidation with outcomes better than projected. The fiscal deficit outturn for 2015 was provisionally estimated at 6.7 percent of GDP, lower than the target of 7.3 percent of GDP. For the first quarter of 2016, the deficit, on cash basis, was provisionally estimated at 0.4 per cent of GDP lower than the target of 1.5 per cent of GDP.
          
      11. Developments in emerging market economies, especially China and Brazil, continue to dampen global growth prospects. In particular, the slowdown in the Chinese economy has adversely impacted global trade, investments and capital flows. Given these prevailing conditions, the global growth outlook remains subdued amid tightening financing conditions, especially in commodity exporting countries including Ghana.
          12. These global developments continued to shape the country’s external sector performance. In the first quarter of 2016, the trade deficit widened on account of lower export receipts, especially for oil and cocoa as both price and production volumes declined. However, the overall effect on the current account balance was moderated by lower outflows from the services and income account coupled with improved inward private transfers. The provisional outturn of the current account deficit for the first quarter was 1.2 percent of GDP, compared with 1.9 percent in the same period of 2015.
              
          13. The recent stability in the local currency has continued on the back of tight policy stance and improved inflows. As at 12th May 2016, the cedi had depreciated by 0.3 percent against the US dollar compared with a depreciation of 17.2 percent in the same period of 2015. In the outlook, the tight policy stance is needed to deepen the gains made on the foreign exchange market and strengthen the disinflation process over the forecast horizon.
              
          14. In assessing the current economic conditions, the Committee views the risks to inflation and growth as balanced and therefore decided to maintain the monetary policy rate at 26 percent. The Committee remains committed to its price stability mandate and will continue to monitor developments in the economy and take further policy actions, if necessary."
              
              
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