The Bank of Ghana (BoG) is tilted more towards cutting its benchmark rate, the policy rate on Monday than holding it firm for the ninth time running.

It followed a drop in inflation last month that has since signaled the softening of risks to price pressures but strengthened the case for a monetary policy decision that bolsters growth.

With the effects of COVID-19 waning, inflation now at 8.5 per cent and the policy rate still at 14.5 per cent, the seven-member Monetary Policy Committee (MPC) of the BoG has more room to signal monetary easing by cutting the rate after more than a year of tightening.

To do that though, the bank would have to be double sure that risks to inflation on the non-food side, including the impact of new tax measures and hikes in petroleum product prices and port charges, could be muted by the positive showings in the food basket.

Tight regime

Started in March last year, the tight monetary stance was one of the central bank’s strategies to rein in price pressures, mitigate the effects of fiscal excesses on the economy and generally ward off the pandemic’s fallouts.
After cutting the rate by 150 basis points bps in March last year, the bank maintained it at 14.5 per cent in the MPC’s nine consecutive meetings that preceded the outbreak of COVID-19 in the country.

Although the pressure from the fiscal side remained elevated, the BoG’s stance helped to revert inflation back to its pre-COVID-19 terrain, lowered the pressure on the deficit and kept growth on the positive territory.

Case for reduction
Thus, as the committee wrapped up its 100th meeting on Friday, May 28 ahead of a rate decision on Monday, proponents of a rate cut on the MPC would be pointing the committee to the fall in inflation from 10.3 per cent in March to 8.5 per cent in April, the widening of the gap between inflation and the policy rate (the real interest rate) to six per cent and its impact on the government borrowing and the effect of a lowered policy rate on growth prospects.

In the inflation front, the weakening of inflationary pressures from the food basket has been significant in the April reading. It bolstered hopes that subdued risks from food inflation could dowse emerging and future pressures from the non-food basket to help sustain the disinflationary path.

A lowered rate could also be opportune oiling to the economy, which requires all the support it can garner to quicken the recovery pace from the COVID-19 battering.

This bolsters the case for a cautious cut in the rate of between 50 basis points (bps) and 100bps to signal a return to easing.

Fiscal risk

While the situation on the inflation front is tempting for a reduction in the rate, the fiscal situation still calls for caution.

In its March press statement, the BoG Governor and Chairman of the MPC, Dr Ernest Addison, said while the signal from the 2021 budget on the fiscal situation was comforting, it fell below expectations.

“The 2021 budget has set fiscal policy on an adjustment path albeit slower than originally anticipated. The adjustment for 2021 is expected to be driven, mainly by revenue-enhancing measures and to a lesser extent, expenditure rationalization due to the need to continue the stimulus programmes.”

“The committee assessed achieving the enhanced revenue targets and the heavy reliance on the domestic market as the main risks to the budget,” he added.

This could be the key constraining factor to the committee and the bank in general in any attempt to cut the rate.

As one central bank source said, maintaining the rate at 14.5 per cent in the third quarter would mean that BoG is tightening further.

But does the bank need to tighten further or at worse signal that?