Interest rates to go up …as IMF demands policy rate hike


The cost of borrowing in the country is more likely to go up from next week, when the Monetary Policy Committee (MPC) of the Bank of Ghana (BoG) announces its policy rate decision on Monday.

The MPC is scheduled to convene today for its 68th Regular meeting to assess the economy’s health amid the slowdown in economic activities and increased cost of living as well as the declining commodity prices on the world market.

The policy rate serves as the indicative rate at which the central bank lends to commercial banks, and in turn acts as a benchmark by which the banks also lend to the public – currently standing at 26 percent, the highest in 11 years, and is expected to see at least a further 100 basis points rise as inflation continues to drift from the set target.

Information gathered by the B&FT from the central bank indicates that the MPC will strongly approve further tightening the policy stance for the fourth consecutive time, in a bid to rein-in the pass-through effects of the cedi’s declining value as well as the recent increases in utilities’ tariffs and petroleum prices.

Headline inflation has remained elevated since the last time the MPC met in November last year, which broadly reflects the effects of continued currency depreciation in the past couple of weeks and implementation of the new energy levies and their pass-through effects of petroleum and transport price hikes.

At the end of December 2015, inflation jumped to17.7 percent from 17.6 percent in November, as the new taxes on petroleum products have pushed up domestic ex-pump prices.

According to the National Statistics office, both the food and non-food inflation group recorded increases in inflation.

The International Monetary Fund (IMF), which is helping the government to manage the economy, on Wednesday indicated that following the large increase in utility tariffs implemented in December, inflation will remain above the upper band of the target until the end of 2016 compared to mid-2016 as previously projected.

The Fund has consequently urged the central bank in its second review of the ongoing Extended Credit facility Programme to further hike the policy rate, saying:

“To help bring inflation down toward its medium-term target, the BoG should stand ready to further tighten monetary policy if inflationary pressures do not recede as expected”.

As anticipated by the central bank, utility prices have gone up by more than 63 percent on the average with prices of petroleum products also shooting up by an average of 33 percent at the pumps — feeding in to the inflationary pressures.

Developments in the global commodities market have somewhat not been helpful, as they are also expected to worsen the country’s trade balance outturn — with uncertainties in the foreign exchange market further fueling inflation and inflation expectations despite the modest gains made since October 2015.

The cedi, which ended 2015 at GH₵3.79 to the US dollar on the interbank market, is now trading GH₵3.81.

During the first half of 2015 the cedi lost more than 23 percent of its value against the US dollar, and the central bank will be guided by this fact: increasing the policy rate will be an option that will lure investors to hold onto cedi assets rather than the greenback.

The Governor of the BoG Dr. Kofi Wampah, said at the last MPC meeting in November that maintaining a tight monetary policy stance will reinforce the relative stability in the foreign exchange market, and dampen risks related to the external financial conditions.

However, some economists have argued against the continued use of the policy rate to fight inflation as a result of its detrimental effects on economic growth.

The IMF itself conceded that credit to the private sector has declined sharply.

Professor Peter Quartey, of the Institute of Statistical Social and Economic Research (ISSER) at the University of Ghana, recently told the B&FT that the continued tightening of monetary policy to curb inflation will not achieve its purpose — and therefore a new strategy is needed that will rather reduce the policy rate in order to make credit more accessible for the private sector to produce more goods and services so as to arrest the inflation problem.

“Inflation is caused by several factors, such as demand and supply forces.

The demand side is when the demand for goods and services outstrips supply.

In other words, more money will be chasing fewer goods.

Over the years, government has been tightening monetary policy to tackle the demand side by increasing interest rates to mop up excess liquidity in the system.

But it has not worked, because when the policy rate increases the banks are quick to also increase their interest rates.

This prevents businesses from accessing loans to produce more, thereby creating shortages of goods and services.

So, no matter how you tighten the system you will not be able to correct the problem,” he said.


Source: B&FT Online