The Bank of Ghana (BoG) has cut its benchmark interest rate by 100 basis points from 23.5 to 22.5 percent, citing a downward trend in inflation towards medium term targets.
The BoG has set eight plus or minus two percentage points as its medium target and the central bank Governor, Dr Ernest Addison is confident that the downside risks to growth outweigh the upside risks to inflation in the outlook and therefore the decision to cut the policy rate.
The policy cut reflected lower risks to inflation despite a rise in the figure to 13.0 per cent in April due to higher petroleum prices, Governor Addison told a news conference in Accra.
“The committee judges that the downside risks to growth outweigh the upside risks to inflation,” he said after a Monetary Policy Committee meeting, addressing his first news conference since President Nana Akufo-Addo appointed him in March.
Dr Ernest Addison who doubles as the Monetary Policy Committee Chairman said the committee had observed that headline inflation, and inflation expectations have broadly trended downwards, which was supported by tight policy stance and exchange rate stability.
“With a stable outlook for exchange rate movements and return to the path of fiscal consolidation, headline inflation is expected to trend towards the medium-term target in 2018, barring any unanticipated shocks”, he said.
The 2017 budget indicates a return to the path of fiscal consolidation. The reduction in the fiscal deficit for the year is expected to foster more stable macroeconomic conditions. Rigorous and steadfast implementation of the budget is therefore critical to the outlook.
Private business growth
The Governor noted that the pace of economic activity has picked up, driven mainly by growth in private sector credit, improved business sentiments and easing credit stance.
He said increased oil production from both Jubilee and TEN fields and the coming on stream of further activity in the oil and gas sector from the Sankofa Gyenyame Ntomme (SGN) fields by the third quarter should give added impetus to overall growth prospects.
“There is evidence to suggest that the economic imbalances that existed at the end of 2016 are giving way to stronger fundamentals with economic activity expected to pick up strongly in the period ahead, although below potential”, he said.
He said developments in the external sector point to significant recovery in exports over the first four months of 2017, on the back of increased production volumes and prices of gold and crude oil.
This, together with lower imports, resulted in a trade surplus estimated at 2.5 percent of GDP, compared to a deficit of 2.2 per cent recorded in same period of last year.
The volatility in the foreign exchange market observed at the last MPC meeting has eased significantly, supported by improved foreign exchange liquidity conditions and the outturn in the trade balance, with a more positive outlook based on significant expected inflows, the governor said.
Cumulatively, the Ghana Cedi has depreciated by 1.0 percent against the US dollar in the year to 18th May 2017, compared with 3.5 percent reported at the last MPC round.
Foreign reserves
Gross International Reserves increased to US$6.4 billion, an equivalent of 3.7 months of import cover, at the end of April 2017 from US$4.9 billion from 2.8 months of import cover at end-2016.
Ghana had one of Africa’s most dynamic economies due to its exports of gold, cocoa and oil until it was hit by a fall in oil prices and a fiscal crisis caused by government spending on civil service wages.
The country is now following a $918-million International Monetary Fund programme to restore fiscal balance. The programme is set to end in April 2018.
Inflation was 13 percent in April, near the lowest rate since 2013, compared with a peak of 19.2 percent last March when the cedi was weakening.
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