The Economist Intelligent Unit (EIU) says there will be hardly any room for the Bank of Ghana (BoG) to cut its policy rate, as inflation is further expected to inch up in the coming months.
According to its Country Report for September 2019, due to factors such as depreciation of the cedi, slow pace of fiscal consolidation, and growth in private consumption, inflation will remain high – and this will affect policy rate decisions for the rest of the year.
If the EIU prediction comes true, it will mean that for the fourth consecutive time this year, the policy rate has remained static at 16 percent after it saw a 100-basis point cut in January this year – further dumping hopes of the private sector to have access to affordable loans from banks, as the policy rate determines, to a large extent, lending rates.“We expect annual average inflation to remain elevated in 2019, although it will moderate slightly to 9.5 percent from 9.8 percent in 2018. The weaker cedi combined with growth in private consumption is driving increases in consumer prices.
“We expect the BoG to manage to keep inflation within the official target band of 6-10 percent during 2020-23; but with relatively slow fiscal consolidation, robust domestic demand and ongoing currency depreciation, inflation will remain elevated at an annual average of 9.1 percent.
“We expect interest rates to be maintained at 16 percent. Inflation will edge up slightly in the final quarter of the year, in line with our full-year forecast; although it will remain within the central bank’s target band of 6-10 percent,” the EIU report said.
The report however added that the situation will not exist for the long-term, as it expects inflation to moderate from next year…giving room for monetary policy easing.
“Inflation is forecast to remain elevated in 2019, moderating slightly to 9.5 percent from 9.8 percent in 2018, suggesting that rates will not be cut further over the year. As inflation moderates further in 2020-21, however, and domestic demand growth weakens, there will be an opportunity for resumption of monetary easing,” the report said.
The Monetary Policy Committee (MPC) of the central bank will announce a new policy rate this Friday, September 20. At the last meeting of the committee, concerns over stability of the economy resulted in a decision to maintain the policy rate for the third time since beginning of the year.
“On the domestic front, economic activity remains strong and broad-based. Although there are some downside risks to growth, mainly from subdued business sentiments and increase in utility tariffs…the Committee, however, observed that the pace of fiscal consolidation has slowed down, mainly reflecting gaps in revenue mobilisation, while the pace of spending has increased.
“This could pose risks to macroeconomic stability if not addressed. Under the circumstances, the Monetary Policy Committee decided to maintain the policy rate at 16 percent,” the MPC said after its last meeting which approved maintenance of the policy rate.
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Source: B&FT
