Debt concerns, inflation push BoG to keep policy rate at 14.5%

February 1, 2022 / Comments (0)

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The Monetary Policy Committee (MPC) of the Bank of Ghana has maintained the policy rate at 14.5 percent, citing elevated risk to inflation and debt sustainability challenges which have triggered some negative reactions from foreign investors.

The decision however comes as no surprise at all, as various analysts predicted same on the back of concerns raised by the Committee that moved it to keep the rate where it is after hiking it by a 100 basis points in November 2021.

The bank said the recent downgrade by international rating agency Fitch, over concerns about the mounting debt situation, has the potential of heightening risk to inflation; in addition to other factors such as rise in crude oil prices, food price uncertainties, rising global inflation among others.

“Although budget implementation for 2021 remained fairly in line with expectations, fiscal and debt sustainability concerns regarding the budget for 2022 and implications for sustained fiscal consolidation efforts have triggered an unfavourable credit rating decision by Fitch Ratings, which has spilled over to the external sector and may further exacerbate the already elevated inflationary expectations…

“Headline inflation has remained above the upper band of the medium-term target of 8±2 percent since September 2021. Additionally, all the core inflation measures and inflation expectations have increased, which point to heightened underlying inflation pressures.

“The latest forecast shows that inflation will likely remain above target in the near-term, driven by both external and domestic factors, and only return to target in about four-quarters ahead. The key risks to the inflation outlook include: rising crude oil price and its transmission to ex-pump petroleum prices and transportation costs; rising global inflation; food price uncertainties; and the fiscal outlook,” the Committee’s report stated.

The Committee further stated that it will continue to closely monitor both domestic and global conditions, in order to take the necessary and appropriate action at its next review of the economy.

“The Committee is of the view that the dynamics associated with the November 2021 policy rate hike are yet to be fully transmitted, and expects the decisive implementation of fiscal correction measures; especially the 20 percent cut in expenditure to help moderate upside risks to the inflation outlook.

“The Committee will continue to monitor the impact of these policy measures, and as needed call an extraordinary meeting to re-assess the inflation outlook over the forecast horizon and take the necessary policy decisions accordingly. Under these circumstances, the Committee has decided to keep the policy rate unchanged at 14.5 percent,” the report said.

Effect on lending

The decision of the MPC, though justified and reasonable, will come at a cost to the private sector – which has always bemoaned the high lending rates of banks in the country.

Average lending rates of commercial banks continue to remain high at more than 20 percent, a situation thath has turned into a blame-game among banks, the Bank of Ghana and government itself, with each blaming one-another.

In the private sector’s eyes, banks are just profiteering from their customers by slapping high interest rates on loans. The banks also say lending rates are high due to the policy rate and risk factors in lending to the private sector. And the Bank of Ghana also feels government’s continuous borrowing at attractive interest rates from the banks is the main cause for the high cost of lending to businesses.

Source: b&ftonline

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