Saturday, 22 July 2017

Monetary Policy Rate could have gone down further

Monetary Policy Strategy

THE primary objective of the Bank of Ghana (BoG) is to pursue sound monetary policies aimed at price stability and creating an enabling environment for sustainable economic growth. Price stability in this context is defined as a medium-term inflation target of 8 percent with a symmetric band of ±2 per cent at which the economy is expected to grow at full potential without excessive inflation pressures.

The Bank of Ghana uses the Monetary Policy Rate (MPR) as the primary policy tool to set the monetary policy stance to anchor inflationary expectations in the economy. In other words, the Bank of Ghana uses inflation – targeting as a policy tool to achieve the objective of price stability.

It is important to emphasize that the primary objective of the Bank of Ghana should not be aimed at price stability alone but also creating an enabling environment for sustainable economic growth. This is why interest rates, exchange rates and productivity growth are also of concern to the Bank of Ghana. In my view, a realistic monetary policy rate should be targeting a balance among these macro-economic variables.

Interest Rates Mismatches
The MPR must make commercial and economic sense when compared with the other interest rates in the economy. For example, in April 2016, when the MPR was 26.0%, the interbank weighted average rate was close to it at 25.43% and the average lending rate was 32.1% which is about 6% above the MPR. Around that time, the Treasurybill rate was about 23.0% for 91 days, 25.0% for 182 days and 23.0% for 365 days. These rates did not change significantly till November 2016 showing a gap of about 3% between the 91-day and 365-day rates on hand the MPR on the other.

As at April 2017, the MPR was 23.5% with an interbank weighted average of 23.4% and the average lending rate of 30.5% about 7% above the MPR. During this same time the treasury rates have fallen to 16.47%, 16.77% and 18.25% for 91 days, 182 days and 365 days respectively. These rates indicate significant gaps of 7.03%, 6.73% and 5.25% when juxtaposed against the MPR. These gaps have doubled compared with that of April 2016 and it is a sign of an anomaly either on the part of the TB rates or the MPR is still too high.


Stability in the Money, Goods& Services, and Forex Markets
There appears to be some improvements and reasonable stability in the money market, goods and services market, and the foreign exchange market. These support a reduction of the Monetary Policy Rate (MPR).

Treasury bill rates have declined from 22.8%, 24.6% and 23.0% for 91 days, 182 days and 365 days respectively in April 2016 to 16.5%, 16.8% and 18.3% for the 91 days, 182 days and 365 days respectively as at April 2017.

Inflation has decreased from 18.7% in April 2016 to about 13.0% currently. It has been downward on month by month basis since September 2017 with the exception of April 2017 which increased marginally.

The exchange rate has also been relatively stable on month by month basis since the beginning of 2017 with an average rate of GHc4.20 per USD1.00 apart from February 2017 where it increased to GHc4.48.

External Sector
The external sector of the economy has also improved on a month by month basis with the trade balance improving from -4.0% of trade balance as a percentage of GDP in December 2016 to the current 2.5% of trade balance as a percentage of GDP. Gross Foreign Assets also has improved from USD6.4 billion to USD8.3 billion during the same period. Thus improving the import cover from 3.5 months to 4.8 months.

Debt Position
The public debt did not change significantly in USD terms at about USD29 billion since December 2016 but it has increased from GHc122.6 billion to GHc127.1 billion by the end of the first quarter of 2017. However, the debt to GDP ratio improved from 73.3% to 62.5%.

Economic Growth
Economic activities have picked up essentially from a renewed confidence from the private sector witnessed from the steady growth of private sector credits from an annual real growth of -0.8% in December 2016 to 5.9% by the end of the first quarter. Expected increase in oil production from the Jubilee and TEN fields as well as the Sankofa Gye Nyame Ntomme (SGN) fields are good signs of growth prospects. The down side risk to growth is the falling prices of cocoa from a realized year on year change of 3.1% in December 2016 to -2.2% by the end of April 2017. This may be compensated by the positive outlook of gold prices.

Conclusion
Even though the Monetary Policy Committee members have done well by reducing the MPR by 100 basis points to 22.5%, it could have come down by up to 200 basis points. Given the growth prospects and the emergence of strong economic fundamentals vis-à-vis the month by month improvement and stability in the goods and services market, foreign exchange market, and the money market. The MPR could have been reduced by 150 to 200 basis point to either 22.0% or 21.5%. The MPR must establish a certain equilibrium not only in the goods and services market, but the forex market and financial services market. Currently, the gap between the Treasury bill rates and the MPR is an anomaly which has to be corrected.

The Monetary Policy Committee members of Bank of Ghana need to keep their eyes very well on the gaps existing between the MPR and all other interest rates in the system. This is necessary if the primary objective of the Bank of Ghana is to pursue sound monetary policies aimed not only at price stability but creating an enabling environment for sustainable economic growth.