Monetary Policy Committee Meets on Jan. 22 https://t.co/jT8DGQPd9r #BFT pic.twitter.com/5CUTQsHzLO
— B&FT (@bftghana) January 19, 2016
The MPC has surprised many economists with its past few decisions, hiking when many expected it to leave the rate unchanged. It is unpredictable because one can have an idea of the general macroeconomic issues, but the way the MPC decides to respond to it is not set in stone. However, I have five reasons why I think the MPC will hike the rate to 27% from the current 26%.
1. Inflation remains far above target
Inflation for December was 17.7% even as the BoG targeted 13.5%. Despite arguments from some economists that our inflation is cost-push and not due to excess liquidity, the BoG remains very hawkish and is convinced that monetary policy will rein in inflation.
2. Cedi faces sharp depreciation
Chart 1: USD/GHS over last 30 days [oanda.com]
As seen in Chart 1, the cedi has recently depreciated sharply against the dollar. The favoured response of the BoG to this has been to further tighten. Depreciation of the currency makes imports expensive and in order for this not to increase inflation the BoG chooses to make it more difficult to come by money.
3. Collapse of oil price
Forget fall, the oil price has collapsed. It looks like US$30 went from a price floor to a price ceiling. With Ghana’s budget prepared (inexplicably) on the basis of a crude price of $53, export revenue is going to be hit very badly, reducing foreign exchange inflows. A hike would help to check currency depreciation from the wider deficit.
4. The IMF supports further hikes
During the approval of the third $114.6m tranche of payments to Ghana, Mr. Min Zhu, Acting Chair and Deputy Managing Director of the IMF is reported by B&FT to have said:
To help bring inflation down toward its medium-term target, Bank of Ghana (BoG) should stand ready to further tighten monetary policy if inflationary pressures do not recede as expected.
We can’t risk a credibility blow at this time so we’re unlikely to ignore this not so subtle signal from the IMF.
5. New levies on Petroleum products
I left the obvious one for last. As with the increase in utility tariffs, the BoG is likely to hike in anticipation of the effect of the new levies on petroleum products on the inflation rate.