The Monetary Policy Committee of the Bank of Ghana has, in a rather surprise turn of events, cut the monetary policy rate by a 100-basis points, against predictions by analysts that the recent fuel price increments and upward adjustment in taxes may keep the rate at its former figure.

The cut means the policy rate is now 13.5 percent, ending a year-long cycle of maintaining the rate at 14.5 percent for six successive times due to heightened inflation risk and the depleting fiscal situation exacerbated by the onslaught of the pandemic on the economy.8
The committee at its 100th meeting said its analysis of the economy shows despite the increment in fuel prices together with the new taxes introduced in the 2021 budget taking effect earlier in May, it is confident that these developments will not lead to a surge in inflation in the near-term, even though such risk could exist in the medium term, hence, the decision to slash the rate by a 100-basis point.

“Headline inflation eased sharply to within the medium-term target band, driven mainly by lower food prices and base drift effects, a tight monetary policy stance and stable exchange rate conditions. Since the initial shock to inflation in April 2020, the forecast showed that inflation will be close to the central target by June 2021. These forecasts remain broadly unchanged and inflation would remain within the target band in the next quarter.

Risks to the inflation outlook appear muted in the near-term, but pressures from mostly rents and transport fares, would require some monitoring to anchor inflation expectations. Under these circumstances, the Committee decided to lower the Monetary Policy Rate by 100 basis points to 13.5 percent. The Committee will continue to monitor price developments closely and take appropriate action, where necessary, to contain all potential pressures to the inflation outlook,” a statement from the committee said.

A further reason some analysts thought may push the central bank to maintain the rate at 14.5 percent is its possible impact of foreign investors’ appetite on the local bond market. One such concern was raised by Professor Peter Quartey, Director of the Institute of Statistics, Social and Economic Research at the University of Ghana, who told the B&FT in an interview earlier that cutting the rate may be a disincentive to non-residents who have purchased the country’s bonds, and that can inform them to look to other markets offering higher yields.

“We have foreign investors who hold on to our local bonds. If you reduce the policy rate, they may exit the market and that can lead to capital flight. We saw that in 2019 and so we must be cautious of that situation too,” he said.

But addressing that particular concern, Governor of the Central Bank, Dr. Ernest Addison, said there is no cause for alarm as the first three months of the year has seen an appreciable growth in non-residents’ interest in the country’s bonds, a development he is upbeat will continue in that trajectory.

The MPC’s decision will come as a welcome news to the business community as the private sector has consistently cried out to the central bank to bring the policy rate down for banks to reduce lending rates in order for them to access loans at a more affordable cost.

Lending rates of banks is currently averaging 21 percent, higher compared to other peers on the continent.

The central bank says it expects banks to respond positively to the new development, coupled with the already increased demand for loans to support the expected pickup in economic activity, as credit growth to the private sector still remains at the pre-pandemic levels.