Ghana cuts rate 50 bps in first easing since July 2011

    Ghana's central bank cut its policy rate by 50 basis points to 25.50 percent, saying the downside risks to economic growth now outweighed the risks of high inflation.
     It is the first change in policy by the Bank of Ghana (BOG) since the last rate hike in November 2015 and the first rate cut since July 2011.
    Between February 2012 and November last year the central bank raised its policy rate by 13.50 percentage points as it sought to curb inflation and depreciation of the cedi's exchange rate.
    But Ghana's inflation rate has trended downward since hitting 19.2 percent in March and eased to 15.8 percent in October from 17.2 percent in September due to lower non-food inflation.
    "Policy tightness and continued stability of the exchange rate largely accounted for the declining trends," the bank said, describing the inflation outlook as "positive."
    The central bank added that it expects inflation to return to its medium-term target band in 2017, supported by continued tight monetary policy and stability in the exchange rate. The central bank targets inflation of 8.0 percent, plus/minus 2 percentage points.
    The cedi started to slowly depreciate in 2013 and fell faster in 2014 and most of 2015. But since October 2015 the exchange rate has been less volatile and depreciated 4.3 percent against the  U.S. dollar between January and October compared with a fall of 15.5 percent in the same 2015 period.
    Today the cedi was trading at 4.07 to the dollar, down from 3.82 at the start of the year for a decline of 6.1 percent.
    "The outlook for the exchange rate remains positive and the Committee is optimistic that the cedi stability would be sustained," the bank said.
    But Ghana's economic growth remains "weak and below trend," the bank said, due to weak global demand, lower commodity prices, disruptions in the production of oil and gas, and weak private sector credit growth due to the central bank's tight policy and fiscal consolidation.
    "These tight conditions are expected to prevail in the outlook," the bank said.
   Ghana's Gross Domestic Product grew by an annual rate of 2.5 percent in the second quarter of this year, down from 4.8 percent in the first quarter.
    In September the International Monetary Fund (IMF) approved a disbursement of US$116.2 million to Ghana as part of 3-year arrangement agreed in 2015 that aimed to restore debt sustainability and macroeconomic stability to help the country's economy.
    The IMF called on the central bank to maintain a tight policy stance to help bring inflation back to its target and although there have been some improvements to central bank governance, it welcomed further amendments so there is zero central bank financing of government finances.
    The IMF added that Ghana had made progress in stabilizing the macroeconomy and reducing fiscal imbalances but there are still risks and called on further efforts to address revenue shortfalls while spending should be fully controlled to contain wages and other spending.
    "The government is projected to run a primary surplus this year, which, along with the stability of the cedi, should contribute to a marked decline in the debt-to-GDP ratio," the IMF said.


    The Bank of Ghana issued the following statement:

  "Ladies and Gentlemen, welcome to this MPC press briefing. We have concluded our 73rd regular MPC meetings, and I present the Committee’s decision and highlights of the deliberations.

1. Headline inflation has gradually trended downwards in the year, despite some upswings occasioned by pass-through effects of upward adjustments in petroleum, utility and transport prices. Policy tightness and continued stability of the exchange rate largely accounted for the declining trends. The latest release from the Ghana Statistical Service shows that, after peaking at 19.2 percent in March 2016, headline inflation fell sharply to 15.8 percent in October from 17.2 percent in September. The most recent decline in inflation was driven mainly by non-food inflation.
   
2. Similarly, the Bank's main measure of core inflation (CPI inflation excluding energy and utility prices) which measures underlying inflation, continued on its descent, declining from 16.9 percent in September to 15.2 percent in October. Other measures of core inflation showed even more significant declines, reflecting a broad- based easing of inflation pressures.
   
3. Given the above developments, the inflation outlook remains positive. Barring any major price shocks, the forecast remains broadly unchanged and inflation is expected to return to the medium-term target band in 2017. The current tight policy stance and exchange rate stability should further support the disinflation process.
   5. Growth has remained subdued for the most part of 2016 largely due to tight credit conditions and the downturn in commodity prices. The Bank’s updated Composite Index of Economic Activity (CIEA) recorded a modest year-on-year growth in the third quarter, compared with the same period last year. The increase in the CIEA was driven by exports, port activities, industrial consumption of electricity and domestic VAT.
      
   6. The Bank’s business and consumer confidence surveys both show improved business and consumer sentiments, though with a marginal uptick in inflation expectations. Overall, assessment of economic prospects was generally positive. This is also affirmed by the successful debut of the 10-year bond, which attracted about 75 percent foreign investor participation. In the immediate outlook, risks to growth remain the current tight policy stance alongside uncertainty in the global economic environment, especially commodity prices.
      
   7. Provisional data on government fiscal operations in the year to September showed a budget deficit of 5.9 percent of GDP, compared with a target of 3.9 percent of GDP. The higher than programmed deficit was mainly due to lower revenues arising from significant shortfalls in oil revenues, while expenditures were broadly on track. The deficit was financed mainly from domestic sources. The fiscal outlook hinges on strengthening revenue mobilization and sustained efforts at containing expenditures.
      
   8. Global activity has continued to rebound amid uncertainties. Most obviously, activity in the advanced economies continue to recover at a slow but steady pace while in the emerging markets and developing economies, economic conditions are gradually stabilizing. However, vulnerabilities in the global economy remain with implications on financing conditions, commodity prices and economic activity. These developments may impact the domestic economy.
      
   9. Ghana’s external sector performance remains strong. The provisional data shows significant improvement in the external trade deficit in the year to September, relative to 2015. This improvement was on account of higher export receipts, mainly from gold, combined with lower imports. The outturn of the trade balance has significantly improved the provisional current account deficit to 3.1 percent, relative to target 5.0 percent of GDP. This, together with foreign inflows from the Euro bond, the pre-export finance facility for cocoa and other expected inflows from development partners will support efforts to build up external reserves.
      10. These developments have supported stability in the foreign exchange market. The Ghana cedi cumulatively depreciated by 4.3 percent against the US dollar between January and October 2016, compared with cumulative depreciation of 15.5 percent in the same period last year. The outlook for the exchange rate remains positive and the Committee is optimistic that the cedi stability would be sustained.
      11. In summary, the Committee noted that the global economy remains fragile with uncertainties. On the domestic front, inflation trends are easing downwards in line with forecasts, alongside subdued underlying inflation. The outlook for inflation is broadly positive as reflected in the continued decline in the underlying inflation, stability in the foreign exchange market, low aggregate demand conditions and general high real interest rates.
      12. Growth conditions remain weak and below trend. This is underpinned by weak global demand, declining commodity prices and disruptions in the production of oil and gas. Other factors include weak private sector credit growth as a result of the tight credit stance and fiscal consolidation efforts. These tight conditions are expected to prevail in the outlook.
      13. With these considerations, the Committee concluded that the downside risks to growth outweigh the risks to inflation and therefore decided to reduce the Policy Rate by 50 basis points to 25.5 percent.
      Information Note
      The next Monetary Policy Committee meeting is scheduled for Friday, January 20, 2017. The meeting will conclude on Monday, January 23, 2017 with an announcement of the policy decision." 
      
      
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