By Cobus de Hart, Chief Economist West and North Africa, NKC African Economics.
The Bank of Ghana (BoG, the central bank) surprised markets by announcing a reduction in the policy rate following the conclusion of the most recent Monetary Policy Committee (MPC) meeting.
After hinting at loosening its stance at some stage during Q1, the BoG opted to reduce the policy rate by 100 bps to 16%.
The consensus view projected a hold of the policy rate. Our view, which incorporated a more aggressive loosening of monetary policy this year compared to consensus calls, only predicted a first rate cut by end-Q1.
Regardless, the BoG’s decision mainly stemmed from the fact that headline inflation is projected to remain within the 6% – 10% target band this year.
Admittedly, the last time the policy rate was at 16% headline inflation hovered between 11.0% y-o-y and 13.8% y-o-y, well above the most recent print of 9.4% y-o-y in December last year. That said, we still deem the most recent decision to be on the aggressive side.
We expected the central bank would have held off on cutting rates to allow for some time to gauge the effects of recent financial sector reforms.
Furthermore, while we also expect headline inflation to remain within the target band this year, upside risks to the outlook have mounted. These risks include intensifying pressure on the exchange rate and reserves.
Another factor to keep a close eye on is the possibility of administered price adjustments scheduled to be announced next month.
State-owned electricity providers in particular have requested sharp upward tariff adjustments (40% – 95% according to some sources) to alleviate financial pressures which have necessitated the accumulation of debt.
However, the same scenario unfolded last year when the government (fairly averse to passing any cost-push pressures on to consumers) surprisingly stepped in and actually announced a reduction in tariffs.
Despite lower oil prices, we think the outcome of the tariff review will play an important role in determining the outlook for monetary policy for the remainder of this year; the confident loosening of monetary policy before the tariff announcement could signal that the central bank already has access to information which has yet to be made public.