Central bank stays policy rate on inflation scare

July 24, 2018 / Comments (0)


After inflation inched up for two consecutive months (May and June), the central bank has decided, at its latest monitoring policy meeting, to maintain its policy rate at 17percent, as a cautious measure.

Inflation in April 2018 reached 9.6 percent, the lowest in more than five years, but rose to 9.8 percent in May and then subsequently to 10 percent in June.

Although it lies within BOG’s inflation target of 8±2, it maintained the policy rate at 17 percent, saying it is monitoring the recent heightened giddiness of the cedi.

Governor of the central bank and chair of the Monetary Policy Committee, Dr. Ernest Addison, told a press conference that he and his charges are monitoring developments in the near-term and stand ready to take the appropriate policy measures to promptly address any potential threats to the disinflation path.

The committee, he said, was of the view that although inflation had moved upwards in the recent readings, this came mainly from the effects of increases in administered prices of petroleum and transportation costs.

“The Committee viewed that second-round effects from these relative price changes would not be significant enough to alter the inflation trajectory over the medium-term. This would require continued fiscal consolidation together with tight monetary policy to keep inflation within the target band,” he added.

“Notwithstanding these developments, underlying inflation pressures remain subdued. The core measure of inflation, which excludes volatile food items and transportation costs, came down. The weighted inflation expectations of businesses, consumers and the financial sector over the next six months declined and remained well-anchored,” the governor said.

Cedi blues

The performance of the cedi was of major concern to the central bank in its decision to maintain the policy rate rather than reduce it. As at July 19, the cedi had depreciated by 5.8 percent against the dollar compared to 3.9 percent in the same period last year.

Given the cedi’s exchange rate propensity to fuel inflationary pressures, the committee’s decision to maintain the rate at 17 percent is part of measures to snuff out any impact the poor performance of the cedi may have on inflation.

Commenting on the performance of the cedi, Dr Addison explained that the macroeconomic fundamentals of the economy remain very strong and that the local currency is rather suffering the brunt of a stronger US dollar.

“Over the past two months, normalisation of US monetary policy resulting in strengthening of the US dollar and rising US yield rates have continued to weigh-in on emerging market assets. A combination of these factors led to tight financing conditions and reverse capital flows in a number of emerging market and frontier economies, including Ghana.

“These external factors, together with increased demand for foreign exchange from the corporate and energy related sectors, exerted pressure on the domestic currency market.

Consequently, the Cedi, which had performed strongly against the major international currencies over the first four months of the year, depreciated in May and June.

In the year to July 19, the Cedi has cumulatively depreciated by 5.8 percent against the US dollar, compared to the 3.9 percent observed during the same period of last year. Despite the sharp depreciation observed, the real effective exchange rate (in trade-weighted terms) remained broadly aligned with underlying fundamentals,” the governor said.

Source: B&FT Online

Leave a Reply

Your email address will not be published. Required fields are marked *