Governor of the central bank Henry Kofi Wampah is confident his new found ‘cedi magic’ could help achieve single-digit inflation much earlier than the BoG had earlier projected.
The BoG has revised down to the fourth quarter of 2016 attainment of the medium-term inflation target of 8±2 percent from the earlier projection of third quarter of 2017.
Despite the Ghana Statistical Service (GSS) announcing that June inflation had risen to 17.1 percent, Mr. Wampah maintains that inflationary pressures stoked by the constant fall of the cedi will wane now that the local currency is recording impressive gains.
The tight monetary policy stance -- evidenced by tight liquidity conditions in the banking sector -- contributed to improvement of the inflation outlook Dr. Wampah told journalists at the MPC press briefing on Wednesday.
“This notwithstanding, the sources of upside risks to inflation over the forecast horizon continue to hinge on exchange rate dynamics and its implications for prices, petroleum and utility price adjustments, and fiscal impulse,” the governor said.
The position of the central bank was also shared by the Institute for Fiscal Studies’ economist Leslie Dwight Mensah, who told the B&FT: "Inflation remains a problem, and this is a fact the MPC recognised.
“However, given that the cedi's strong appreciation is beginning to soften inflation expectations, the MPC felt the outlook is less concerning than it assessed it to be a couple of months ago, which is why it found room to maintain the policy rate,” he said.
There’s little doubt that the strong performance of the local currency has helped steer the economy into still waters away from turbulence that had seen the MPC increase its policy rate by 100 basis points when it last met in May.
The resurgence of the local currency inspired the Monetary Policy Committee of the Bank of Ghana to maintain its key lending rate at 22 percent, just as analysts predicted.
The local currency has since June 30 recorded over 25 percent gain on the dollar, and the surge of the cedi further threatens to reverse entirely the losses it incurred against its major trading partner in 2015.
Speaking at Wednesday’s MPC press briefing, the governor maintained that the recent recovery is partly due to its increase of dollar sales on the interbank market to US$20million a day -- up from US$14million.
The cedi was trading at 4.33 to the US dollar as at June 30 (year-to-date depreciation of 26.2 percent). However, as at July 14 it was trading at GH¢3.31 to the US dollar (year-to-date depreciation of 3.4 percent).
‘Tight monetary stance’
In addition to the policy rate decision, the MPC said it has directed the Bank of Ghana to introduce additional measures to streamline monetary operations.
According to Dr. Wampah, to enhance transparency in monetary operations and improve the transmission mechanism, the monetary policy rate will be merged with the reverse repo rate within 30 days.
The merger of the rate will be immediately followed by the introduction of a 7-day reverse repo instrument in the money market to offer more flexibility in the liquidity management of banks.
Resident IFS Economist Mr. Mensah said: "The liquidity measures are also an attempt by the MPC to support the transmission of its more benign sentiments to market interest rates".
Analysts believe that the adjustments to monetary operations are intended actually to support an easing of interest rates in the market (i.e. interbank interest rates, T-bills rates, etc). The central bank, they argue, will do this by improving the supply of liquidity among banks to make it easier for the rates, which are currently very high, to fall.
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