BoG maintains policy rate to keep investor interest

November 27, 2019 / Comments (0)


The Monetary Policy Committee (MPC) of the Bank of Ghana (BoG) has, once again, maintained the policy rate at 16 percent, as it fears investors will look for other alternate markets that offer more attractive rates if it is reduced.

The decision means that for the entire calendar year, the policy rate was reduced only a 100 basis points in January; as against last year, when it saw a reduction of 300 basis points. The Committee maintains it was the right decision to keep the rate where it is, as central banks all over the world have shifted toward accommodative policy rates due to slow global economic growth.

“Major central banks have therefore shifted toward an accommodative monetary policy stance, which will likely persist until signs of growth emergence or inflation pick-up becomes evident. These developments have triggered favourable global financing conditions as investors search for yield in emerging market and frontier economies with strong fundamentals, underscoring the need to further consolidate the macroeconomic gains and position the economy to benefit from the favourable external financing conditions.

“The latest forecast shows that inflation will remain within the target band over the forecast horizon, barring any unforeseen shocks. Inflation expectations, derived from the surveys, remain fairly anchored in single digits; and core inflation (excluding energy and utilities) is expected to remain at low levels. In view of the Committee’s assessment, risks to the inflation outlook were broadly balanced; therefore, the Committee decided to maintain the policy rate at 16 percent while monitoring developments going forward,” said the MPC release, which was presented by Governor of the BoG, Dr. Ernest Addison.

Commenting on the decision, Director of the Institute of Social, Statistical and Economic Research (ISSER), Prof. Peter Quartey, said the central bank had no option other than to maintain the rate, as increasing it would go against government policy and reducing it would result in negative reactions from investors who hold stakes in locally-denominated bonds.

“Government policy is to ensure lower cost of doing business. So, an increase in policy rate is not an option for government. Although government wants lower interest rates, there are also some constituents who hold quite a big proportion of our locally-denominated bonds. If you slash interest rates, there will be capital flight and they’d move their funds from the country – and that would have repercussions on our exchange rate.

“That is why in March we saw turbulence in our exchange rate, because the policy rate was reduced [in January] and those investors moved out of the market. So, analysing the economy, looking at the fundamentals and everything, that is the most prudent way the BoG should go,” he told the B&FT in an interview.

The professor further stated that besides protecting the interest of such investors, the economic fundamentals and inflation expectations do not provide enough grounds or reasons for the Committee to slash the policy rate.

“Usually, in adjusting policy rate there is discussion on what has changed in terms of GDP or economic activity. Has it increased? Is the economy overheating? If not, then there is no need to change the monetary policy. Then again, you look at the exchange rate; has it depreciated significantly? If not, then there is no basis for changing the policy rate. Also, inflation and inflation expectations; has they changed significantly? If not, then you don’t have the basis for changing policy rate,” he maintained.

Source: B&FT Online

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