The cut in the main policy rate of the Bank of Ghana (BoG) will lower borrowing costs, and provide a boost to liquidity and economic activity, a report published by Ecobank Research has said.
According to the Research body, “already, the revised Composite Index of Economic Activity has showed a pick-up in activity, and business and consumer sentiments have improved.
The report emphasized that the decision to ease monetary policy reflects the BoG’s considerations that inflationary pressure has begun to subside but added that tight financing conditions pose risks to the economic growth outlook.
It said that Ghana’s growth prospects could be undermined by ongoing fiscal consolidation, tight credit conditions and a delayed recovery in commodity prices.
The move by the BoG marks its first interest rate cut since July 2011. Since then, the rate has been raised 11 times by a total of 1,250 basis points amid efforts to reduce inflation and prop up the weak Ghana cedi.
Headline inflation, which stood at 17.2 per cent year-on-year in September 2016, slowed to 15.8 percent year-on-year in October 2016; however the report said it remains well above the BoG’s 6.0-10.0 percent medium-term target range.
Continuing, the report said that the rate of policy rate decline is owing to positive developments under the country’s IMF-supported USD918mn Extended Credit Facility (ECF) approved in April 2015.
However, fiscal consolidation it noted has faced challenges -the provisional budget deficit equaled 5.9 percent of GDP in Quarter 3 2016 against a target of 3.9 percent of GDP, due mainly to revenue shortfalls, while public expenditure was broadly contained.
The local currency has remained broadly stable since the end of last year, helping to contain inflation; this is owing to BoG’s tight monetary policy, fiscal consolidation efforts, increased USD availability (driven by FDI, bonds, loans and export receipts), and improved investor confidence following the IMF’s third consecutive positive review under the ECF in May 2016, the report added.
While the current level of inflation is still high compared to the medium-term target, the BoG expects inflation to have peaked in first quarter of 2016, and further expects it to decelerate to within the target range in 2017.
However, the relatively small reduction of only 50 basis points highlights the regulators concern that price pressures still remain, the report stated.
Primary market yields have fallen by 100-211 basis points since October for 91-day to 2-year tenors, amid lower inflation expectations.
Source: The Finder
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