[ 2014-09-18 ]

Bank of Ghana keeps policy rate at 19 percent
Speaking at a news conference in Accra Tuesday,
the Governor of the Bank of Ghana, Kofi Wampah,
cited expected inflows from cocoa loan syndication
as the main reason for keeping the rates
unchanged.

Below is the full statement by the Bank of Ghana
It is my pleasure to welcome you, Ladies and
Gentlemen of the media, to this briefing of the
61st regular meeting of the Monetary Policy
Committee (MPC). The Committee met to review
recent macroeconomic developments and assess the
risks to the outlook. I present to you the
highlights of the discussions and the decision on
the stance of monetary policy.

Global Economic Developments
1. The July update of the IMF World Economic
Outlook noted that the world economy in 2014 is
likely to grow at a slower pace than initially
anticipated as a result of weaker growth in the
US, China and other emerging markets as well as
geopolitical developments in Ukraine, Iraq and the
Middle East. Global growth is now forecast at 3.4
percent in 2014, down from the April forecast of
3.7 percent.

2. Growth in the US is projected at 1.7 percent
for 2014, rising to 3 percent in 2015, while
growth in the euro area is expected to strengthen
to 1.1 percent in 2014 and 1.5 percent in 2015 but
expected to remain uneven across the region. In
emerging markets and developing economies, growth
is now projected to decrease to 4.6 percent in
2014 before strengthening to 5.2 percent in 2015.

3. Globally, inflation is expected to stay subdued
in 2014–15 with continued sizable negative
output gaps in advanced economies, weaker domestic
demand in several emerging market economies, and
falling commodity prices.

4. While the outlook for inflation in the US
remains stable amid an expected growth rebound,
falling inflation in the Euro area suggests
increasing deflation risks in the outlook. In
emerging markets and developing economies,
inflation is expected to decline from about 6
percent currently to around 5 percent by 2015.

5. International oil prices have remained
relatively stable despite recent tensions in
Ukraine, Iraq and the Middle East, with crude oil
continuing to trade around US$103.5 a barrel. Gold
prices are hovering around US$1,295.5 an ounce
while cocoa prices have risen steadily from
US$2,746 to US$3,225 per tonne over the first
eight months of 2014.

6. The outlook for the rest of 2014 suggests that
the price of crude oil could average US$103 per
barrel, while that of gold would average US$1,225
per ounce. Cocoa prices are also projected to
remain above US$3,000 per tonne.

These developments will have implications for the
domestic economy.

The Domestic Economy
Growth and Inflation
7. The indications are that the pace of domestic
economic activity continued to firm during the
second quarter in spite of the ongoing economic
challenges. Bank of Ghana's CIEA for the second
quarter of 2014 suggests improved activity
relative to the same period in 2013. The index
registered a year on year real growth of 10.8
percent at the end of June, 2014, compared with a
growth of 3.3 percent for the corresponding period
in 2013. The main drivers of the improved economic
activity for the period under consideration were
domestic VAT and DMBs credit to the private
sector.

8. The Bank's surveys of consumer and business
confidence reflected mixed sentiments. The
consumer confidence index improved during the
August survey, as the index moved to 77.5 from
76.1 in May 2014. The survey respondents were
mildly positive about economic prospects.

9. The business confidence index on the other hand
indicated continued softening in sentiments. The
index dipped from 82.8 in March to 78.6 in June
2014. Among the perceptions cited were: low
prospects for improved capital outlay, sales and
revenues, negative sentiments on industrial growth
and heightened inflation expectations.

10. Since the last MPC meeting, inflation has
continued to increase reaching 15.9 percent in
August 2014. Non-food inflation rose to 24 percent
from 20 percent in May 2014, driven mainly by
exchange rate pass-through effects, but food
inflation on the other hand eased to 5.1 percent
from 8 percent in May.

Monetary Developments
11. Broad money (M2+) grew by 35.2 percent
year-on-year at end July 2014 to GH¢31.5 billion,
compared with a growth of 17.1 percent in the same
period last year. The growth in broad money was
driven by increases in the NDA of the banking
sector. Similarly, the annual growth in reserve
money was 42 percent in July 2014, compared with
19.6 percent in July 2013.

12.The banking industry continued to experience
steady growth in both nominal and real terms,
evidenced by trends in total assets as well as
branch expansion across the industry. Total assets
increased by 39.7 percent to GH¢44.2 billion in
July 2014. Of the total, advances constituted 45.8
percent.

13. Credit to the private sector remained strong.
In nominal terms, credit to the private sector
grew by 46.2 percent in July 2014, compared to
28.1 percent in the same period last year. Real
credit growth was 26.8 percent compared to 14.6
percent a year ago. The credit growth was funded
mainly by increased mobilisation of deposits by
the banking system.

14. Non-performing loans (NPL) ratio adjusted for
fully provisioned loans, increased marginally from
5.3 percent in July 2013 to 5.4 percent in July
2014. However, the unadjusted NPL ratio declined
from 12.9 percent to 12.3 percent in the same
comparative period. The capital adequacy ratio for
the banking industry declined to 16.2 percent
compared to 18.6 percent in the corresponding
period last year, but remained well above the
regulatory threshold of 10 percent.

15.Interest rates have generally trended up on the
money market between December 2013 and August
2014:

The rate on the 91-day instrument increased to 25
per cent from 19.2 percent. Similarly, that on the
182-day instrument increased to 26.4 percent from
18.7 percent.

The rate on the 1-year note rose to 22.5 percent
from 17 percent, and the rate on the 2-year
increased to 23 percent from 16.8 percent.

The 3-year bond rate rose to 25.5 percent from
19.2 percent.

16. The weighted average interbank rate increased
to 24.2 percent from 16.3 percent in December
2013.

17. Average lending rates of the banks rose to
27.8 percent from 25.6 percent in December 2013.
The average rate on 3-month term deposits
increased marginally to 13 percent from 12.5
percent.

Government Fiscal Operations
18. Provisional outturn for broad fiscal
performance for the period January-July 2014
suggests an overall budget deficit estimated at
5.3 percent of GDP against a budget target of 5.1
percent, compared to a deficit of 5.6 percent in
the same period in 2013.

19. Total revenue and grants was GH¢13.3 billion,
against a budget target of GH¢14 billion. Of this
outturn, domestic revenue was GH¢12.9 billion,
below the target of GH¢13.3 billion. Total tax
revenue amounted to GH¢10.2 billion, lower than
the target of GH¢10.5 billion and non-tax
revenues was GH¢2.6 billion, compared to the
budgeted target of GH¢2.7 billion.

20. Total expenditures, including payments for the
clearance of arrears and outstanding commitments,
amounted to GH¢19.3 billion, lower than the
target of GH¢19.8 billion. Compensation of
employees was GH¢5.9 billion compared to a target
of GH¢6.3 billion. Interest payments totaled
GH¢3.7 billion, against a target of GH¢4
billion.

21. The deficit of GH¢6.1 billion was financed
mainly from domestic sources, resulting in a Net
Domestic Financing (NDF) of GH¢4.8 billion,
higher than the budget target of GH¢4.2 billion.
Foreign financing of the budget amounted to
GH¢1.3 billion, higher than the target of GH¢1.2
billion.

22.The stock of public sector debt as at end of
June 2014 was 55.4 percent of GDP, marginally
lower than the 55.5 percent observed at the end of
December 2013. Of the total public sector debt,
domestic debt constituted 43.9 percent and
external debt was 56.1 percent.

External Sector Developments
23.For the first eight months of the year,
merchandise exports was estimated at US$9 billion,
compared to US$9.4 billion in the same period last
year. This was mainly due to lower gold export
earnings of US$2.9 billion compared to US$3.4
billion in the corresponding period of 2013.
Exports of cocoa beans, on the other hand,
increased to US$1.4 billion from US$1.2 billion,
due to higher volumes. Oil exports remained
virtually unchanged at US$2.6 billion, while
earnings from non-traditional exports (including
cocoa products) declined marginally by US$44.9
million to US$2.1 billion.

24. Total imports for the review period fell
significantly to US$9.5 billion from US$11.7
billion in 2013. Oil imports fell by 10 percent to
US$2.3 billion while non-oil imports declined by
22 percent to US$7.2 billion. These developments
resulted in a provisional trade deficit of US$495
million compared to a deficit of US$2.2 billion a
year ago.

25.For the first half of the year, the overall
balance of payments recorded a deficit of US$1.5
billion compared to a deficit of US$677 million in
the same period last year. The current account
deficit narrowed to US$2 billion from US$2.3
billion in the same period of 2013. This was as a
result of an improvement in the trade deficit and
net private transfers. The capital and financial
accounts registered lower net inflows of US$479
million compared with US$1.5 billion recorded same
period last year.

26. Gross international reserves as at end-August,
2014 was estimated at US$4.2 billion, equivalent
to 2.4 months of import cover, as against US$5.6
billion or 3.1 months of import cover at the end
of 2013.

27. During the first eight months of the year, the
local currency depreciated by 29.8 percent against
the US dollar on the interbank market, compared to
3.9 percent in the same period last year.

Summary and Outlook
28. In considering the risks to growth and
inflation, the Committee noted that global growth
remained weak but is expected to rebound.
Commodity price movements remained mixed. In
particular, gold prices have marginally lost
ground. However, cocoa prices have recovered which
is a positive development for the external sector
going forward.

29. On the domestic front, fiscal pressures and
the volatilities in exchange rates continued to
pose challenges to the economy. This
notwithstanding, the latest numbers suggest some
stability in the foreign exchange market as the
earlier policy measures including the cumulative
300 basis points increase in the monetary policy
rate, the 200 basis points increase in the cash
reserve ratio as well as the narrowing of the net
open positions of banks work through the system.

30. In addition, the expected inflows from the
Eurobond and the cocoa syndicated loan will
provide liquidity on the foreign exchange market.
Also, the government's fiscal consolidation
efforts are expected to be strengthened under the
IMF programme which will also provide additional
balance of payments support.

31. The Committee observed softened business
confidence and heightened inflation expectations.
However, the CIEA showed strong growth on the back
of real private sector credit growth with modest
improvement in consumer confidence.

32. The growth outlook is generally positive based
on expected higher cocoa and oil output. In
addition, the gas production which is expected to
come on stream from the latter part of the year
will help address some of the challenges in the
energy sector.

33. In assessing the inflation outlook, the
Committee observed that inflation is expected to
peak in the near term. The latest forecast showed
that inflation is likely to stay slightly above
the upper band of the revised target of 13±2
percent by end 2014. However, inflation is
expected to move within the band in the second
half of 2015 barring any adverse shocks.

34. Given these considerations, the Committee
decided to keep the monetary policy rate unchanged
at 19 percent. The Committee will continue to
monitor developments and take appropriate action
when necessary.

Source - MyjoyOnline

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