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High hopes for policy rate cut

July 18, 2016, 9:44 a.m.

Expectations are high for the Monetary Policy Committee (MPC) of the Bank of Ghana to cut its key policy rate for the first time since July 2011.

The MPC is today expected to announce the monetary policy rate- a signaling rate which is supposed to serve as a reference cap for all other rates in the economy- and many economic watchers are hopeful that current economic indicators support a reduction in the policy rate with the worse being a stay of the rate at 26 percent, which has been so since November last year.

An Economist and senior lecturer at the Economics Department of the University of Ghana, Dr. Eric Osei-Assibey argued that the current relative stability of the interest and inflation rates should give the MPC enough reasons to decrease the policy rate to help reduce cost of borrowing.

“I think the policy rate should be reduced because inflation for the past few months has been stable and even in some occasions, fell. With the three months’ relative stability in the inflation rate, it should serve as a good justification for the central bank to reduce the monetary policy rate.

“The exchange rate to some extent has also stabilized for some time now. And we know these two variables have been the justification of the central bank to adjust the monetary policy rate upwards. So if these two variables appear stabilized then there is no justification for the central bank to increase the policy rate now,” he said.

Inflation fell to 18.4 percent in June from, the lowest since the beginning of the year. The Cedi has also depreciated by only about four percent since January, compared to 24.3 in the first half of last year.

According to the Dr. Osei-Assibey the central bank’s approach to managing inflationary pressures using the policy rates as the key tool has not worked since it does not tackle the source of the problem.

“The over-fixation of inflation targeting appears now to hurt the economy. Letting interest rate remain so high just in the name of achieving lower levels of inflation where we are experiencing high cost of doing business, where utility prices are high, where agricultural and manufacturing sectors are not doing well is not the best.

“This tells us that it is the supply side that is to blame for the high inflation, specifically at a time that there is a huge fiscal consolidation where government expenditure has dropped and the central bank has for a long period of time pursue monetary tightening,” Dr. Osei-Assibey stated.

However, his fellow economist and Head of the Economics Department of the University of Ghana, Prof. Peter Quartey, argues that while it will be good for businesses to see a reduction in the policy rate, the changes in the two key indicators—inflation and exchange rates—are not so significant to give the MPC enough motivation and reason to decrease the policy rate.

He said: “My argument is that the decrease in the inflation rate is marginal and not very significant. Also if you look at the exchange rate movements, there has not been any major change. The economy is not too overheated and therefore I would rather expect that the rate is maintained.”

He however, cautioned that any increase in the policy rate will deal a big blow to businesses and prove inimical to the economy as firms are still reeling under the pressure of high cost of doing business in the country.

“If you increase the policy rate it might have repercussion on the interest rate and that will add to the high cost of doing business in the country. And so because of this I feel they will maintain the policy rate. However, the Bank of Ghana has no justification to increase the policy rate,” Prof. Quartey said.

Economic growth has slowed as prolonged power outages and a drop in the price of main exports, including oil and cocoa, reduced revenue.

Finance Minister Seth Terkper said last month Ghana will sell $1 billion of Eurobonds by September to finance the budget shortfall. Yields on Ghana’s Eurobond due August 2023 fell 2.0 basis points on Friday to an almost 11-month low of 9.75 percent. The cedi has weakened 3.2 percent against the dollar since the start of 2016 after losing 14 percent of its value against the U.S. currency last year.

Source: Thebftonline.com

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