Falling inflation makes room for policy rate cut

Given that inflation at the close of 2019 stayed below the central bank’s target of 8 percent with a band of ±2 percent – an outcome announced on Wednesday by Government Statistician, Professor Kobina Annim – there is an opportunity to cut the monetary policy rate later this month.

Inflation at the end of 2019 stood at 7.9 percent declining from 8.2 percent recorded a month earlier.

The Bank of Ghana says its target band is consistent with the objective of attaining the desired long-term average rate of growth for the economy.

Since the rebasing of the consumer price index in August 2019, during which inflation was at 7.8 percent, headline consumer price inflation has remained well within the target band. In September 2019 it declined to 7.6 percent, then inched upwards in October and November 2019 to 7.7 percent and 8.2 percent respectively.

The last time Bank of Ghana reduced its key Monetary Policy Rate was in January 2019, a 100 basis points cut to 16 percent, at which time inflation stood at 9.4 percent in December 2018. Since then the policy rate has remained at 16 percent throughout the year, much to the chagrin of corporate Ghana who want lower bank lending rates than the levels of still over 20 percent.

However the situation experienced following the last MPR cut in January 2019, when that benchmark cut led to a sharp outflow of foreign portfolio investment, and consequent debt financing problems for government -since at that same period the Federal Reserve was tightening its rate in the US – has persuaded the BoG not to implement any further rate cut.

Nevertheless, the situation a year after that ultimately problematic rate cut is significantly, different given that the Federal Reserve forecasts no action on its main interest rate until 2021, after holding rates steady in its December meeting. This may serve as an opportune window for the BoG to possibly cut the policy rate in response to lower domestic inflation,  a cedi exchange rate that for the first time has stayed stable during the recent end of year festivities period which customarily has seen significant cedi depreciation in previous years, and the need to give slagging economic growth a boost.

Indeed, while the BoG claims to engage in inflation targeting, its benchmark rate setting gives economic growth considerations as much quantitative weight as inflation considerations, and year on year growth was just 5.4 percent as at the third quarter of 2019, well short of the already downward revised target of 7.0 percent.

The Fed’s median rate is forecast to hold steady at 1.6 percent through the end of 2020, but will increase to 1.9 percent in 2021.

In Ghana, the average bank lending rate has progressively declined from 27.76 percent as at the end of January 2019 to 23.65 percent by October 2019, representing a decline of 411 basis points.

December 2019 Inflation

The latest inflation data released by the Ghana Statistical Service (GSS) indicates that inflation was predominantly driven by food, transportation, and housing.

The Consumer Price Index (CPI) measures proportionate changes in the prices of a fixed basket of goods and services that households in Ghana consume.

The Food and Non-alcoholic beverages Division recorded a year-on-year inflation rate of 7.2 percent. This is 1.2 percentage points lower than what was recorded in November 2019 (8.4 percent).

National Non-food year-on-year inflation for December 2019 was 8.5 percent, up from 8.0 percent recorded in November 2019.

Imported and Local Inflation

Inflation for imported goods was 6.1 percent, while the inflation for local goods was 8.7 percent on average. This is the highest rate of local inflation and the lowest rate of inflation for imported goods since August 2019.

Greater Accra Region had the highest inflation rate at 12 percent, while inflation remained lowest in the Ashanti Region with 5 percent year-on-year inf