The Monetary Policy Committee (MPC) of the Bank of Ghana (BoG) has reduced the policy rate by 200 basis point to 23.5 percent after holding it at 25.5 percent since November 2016.
The policy rate, which is the rate at which the central bank lends money to commercial banks, before its reduction, had remained at 25.5 percent for almost five months.
The central bank’s Governor Dr. Abdul Nashir Issahaku addressing the press after the 75th regular Monetary Policy Committee meetings in Accra attributed the reduction in the policy rate to Inflationary pressures which have eased considerably.
“Committee noted that underlying inflation pressures have eased considerably and inflation is projected to trend down towards the medium-term target. Consequently, the MPC has decided to reduce the Monetary Policy Rate by 200 basis points to 23.5 percent.”
“However, there are indications that growth is likely to remain significantly below potential, which alongside an improved inflation outlook provides some scope for monetary policy easing. In addition, recent developments in inflation imply an implicit tightening,” the Governor added.
Meanwhile the Governor Dr. Nashir Issahaku said “the Committee will continue to monitor developments and take appropriate action necessary towards the attainment of its inflation target.”
Prior to today’s reduction there had been calls from the business community as well as some economists for the central bank to reduce the rate.
The BoG has continued to use its monetary policy as an inflation targeting tool to shoot down rising inflation but with inflation trending downwards and the softening of inflationary pressures, Peter Nii Odoi Charway, Head of Research & Strategy at Ideal Capital Partners, is confident the policy rate will be reduced.
The policy rate, which is the indicative rate the BoG lends to commercial banks, currently stands at 25.5 percent and was last reduced by 50 basis points in November last year despite calls for further reduction which have not been met.
According to Mr. Charway: “The MPR should be reduced to boost business activities through a corresponding reduction of lending rates by the commercial banks. A reduction will be consistent with the philosophy of a private sector-led growth of the economy. A reduction by much is entirely up to the MPC to decide, but it should be significant to boost business activities.”
Also, making a case for a reduction of the policy rate, GN Research said: “Given the falling inflation trends, the performance of the cedi especially during 3rd week in March following the auctioning of the US$120 million and the issuance of the bond, the upsurge in investor confidence and the general positive outlook for the economy, the Bank of Ghana is likely to reduce the monetary policy rate to complement government’s efforts.”
At the last MPC meeting in January, the committee held the rate at 25.5 percent amid calls by the business community for a lower rate because of the negative effects of the high rate on the domestic economy.
Though Inflation, has since October last year, fallen consistently from 15.8 percent to 13.2 percent as at last month and is further projected to continue its downward trend after petroleum prices fell marginally, following the scrapping of some taxes in the price build-up.
The petroleum prices, which provide principal inflationary pressures, are expected to fall further in the next pricing window as the local currency, which had depreciated 8.6 percent as at March 10, recovered from its decline to record a year-to-date depreciation of 4.8 percent.