BoG pegs MPR at 14.5% for fifth consecutive time

The Bank of Ghana (BoG) has maintained it’s Monetary Policy Rate (MPR) for the fourth time since it cut to 14.50% in March on account of the COVID-19 pressures.

The central bank Governor, Dr Ernest Addison, cited improved macroeconomic conditions since the last  Monetary Policy Committee (MPC) meeting in September 2020.

This implies that lending rates will remain relatively unchanged in the coming months.

The latest MPR marks the last for the year and represents the lowest MPR since April 2012.

The apex bank said inflation has eased following the spike to 11.4% in April.

At 10.1 per cent for October 2020, inflation is almost at the upper band target.

“The fiscal and monetary policy measures, which have increased liquidity in the

economy, appear not to be impacting inflation, partly due to the existence of the

output gap. As a result, the Committee expects these conditions to support

inflation to return to its central path by the second quarter of 2021,” Dr Addison noted.

The policy rate determines the rate at which commercial banks determine interest rates on loans.

When the BoG cuts the policy rate, it is also trying to morally persuade commercial banks to reduce their lending rates to customers.

The MPR is usually a tool to check inflation pressure, and under favourable conditions, the BoG could cut the MPR to stimulate growth.

Dr Addison noted that global conditions continue to be supportive, domestic inflation is easing, growth prospects are improving, crude oil prices have stabilized, monetary aggregates have expanded, but with minimal impact on inflation, the current account deficit is stable, remittances inflow has remained firm, the exchange rate has been stable, and reserve buffers continue to remain strong.

He cited the evolution of the budget deficit, and the financing needs to support budget implementation and the uncertainty surrounding the pandemic as the key risks for the future.

Before the announcement, the Association of Ghanaian Industries (AGI) had called for further cuts to stimulate growth. However, Dr Addison cited a risk to the budget of the MPR is slashed further.

Analysts had also predicted that the MPR would be held.

With Ghana heading to the polls, there are fears of budget overruns. COVID-19 concerns have also led parliament to suspend the Fiscal Responsibility Act, which permits the Finance Minister to limit expenditure to 5% of GDP.

The World Bank is expecting the fiscal deficit (excluding the energy sector and financial sector costs) to widen to 11.4% of GDP in 2020.

The apex bank is projecting single-digit inflation by the second quarter in 2021.

If this happens, analysts are predicting a slash in the MPR to 11%.

“It could come down to 11 or 12%” if we can get to single-digit inflation with no pressure on the inflation outlook,” Economic Analyst at Databank Group, Courage Boti, told theghanareport.com in an interview.

Provisional data for the first three quarters of 2020, showed an overall budget deficit of 9.0 per cent of GDP against the target of 8.9 per cent of GDP.

The primary balance also recorded a deficit of 4.1 per cent of GDP, marginally above the target of 4.0 per cent of GDP.

Over the review period, total revenue and grants amounted to GH¢36.3 billion (9.4% of GDP) compared with the target of GH¢35.7 billion (9.3% of GDP).

Total expenditures and arrears clearance amounted to GH¢70.9 billion (18.4% of GDP), marginally above the target of GH¢70.0 billion (18.2% of GDP).

Public debt stock was 71 percent of GDP (GH¢273.8 billion) at the end of September 2020 compared with 62.4 percent of GDP (GH¢218.2 billion) at the end of December 2019.

Of the total debt stock, domestic debt was GH¢135.3 billion (35.1% of GDP), of which the financial sector bailout accounts for 4.0 percent of GDP, while external debt was GH¢138.5 billion (35.9% of GDP).

“Interest rate trends on the money market reflected mixed developments as yields
on the short to medium term instruments eased, but broadly tightened at the
longer end.

On a year-on-year basis, the 91-day Treasury bill rate declined to
about 14.1% in October 2020 from 14.7% a year ago. Similarly, the
interest rate on the 182-day instrument declined to 14.1% from 15.1%. With the exception of the 6-year bond, yields on the 7-year, 10-year, 15-
year, and 20-year bonds all increased.