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Money supply to remain tight

Nov. 17, 2016, 8:06 a.m.

- In next two, three months

As the Monetary Policy Committee of the Bank of Ghana (BoG) takes a decision on the benchmark interest rate on Monday November 25, 2016, analysts are expecting a further squeeze in liquidity, at least for the next two to three months.

Some analysts are even predicting about 50 basis points (0.50 per cent) drop in the monetary policy rate of the BoG.

This will mean that there will be less money in circulation chasing goods which some economists argue that it is not good for economic growth.

Though inflation went down from 17.2 per cent in September 2016 to 15.8 percent in October 2016, other analysts also think it is too early for the policy rate to be cut down from 26 percent. 

This is because there are still some inflationary pressures and uncertainty about the cedi’s stability. The local currency lost 0.6 percent in value against the US dollar last week.

Besides that, the festive Christmas and New Year activities which are expected to boost spending could push inflation up, hence the unlikelihood that the policy rate will go up.

Ecobank Research is also projecting a 100 basis points reduction in the policy rate to stimulate spending.

Already, the regulator has given strong indication it will not hesitate to take the appropriate policies, if warranted, to ensure that inflation moves within the target band by mid-2017. The Central Bank’s medium term target is 8±2 percent by mid-2017.

In its recent Monetary Policy Analysis report, the regulator said it latest Fan Chart forecast showed a slight inward shift in the inflation outlook compared to the July forecast. “Changes in the September forecast have been largely accounted for by the underlying assumptions of much tighter fiscal consolidation, lower growth conditions and sustained stability in the foreign exchange market over the forecast horizon expectations, no unanticipated hikes in administered prices as well as continued improvement in the electricity supply, are expected to drive inflation down towards the medium term target band of 8±2 percent by mid-2017.”

On risks assessments, the report said the risks to the outlook for inflation remain broadly unchanged from the last MPC; however, such risks may act in different directions.

At the last Monetary Policy Committee of the Bank of Ghana meeting, the committee maintained the policy rate at 26 percent, saying maintaining the tight monetary policy stance, supported by exchange rate stability and continued fiscal consolidation is needed to sustain the disinflation process over the forecast horizon.

Cost of borrowing has already gone up as some commercial banks have adjusted their lending rates by about three percent further.

Source: Thefinderonline.com

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