Absa Research says it is anticipating that the Bank of Ghana will reduce its policy rate towards the end of the year in line with recent developments in the economy.
Its projection is premised on the fact that inflation which refers to the general rise in the prices of goods and services will reduce in the coming months to about 9 percent.
Absa says this should also fall in line with the Finance Minister’s projection of 8.9 percent.
Absa gave these projections in its commentary on the BoG’s decision to maintain the policy rate at 17 percent on Monday, July 23, 2018.
It said the decision was in line with expectations.
“This was in line with our expectations as we anticipated a more cautious stance on the back of the weaker currency and recent higher inflation prints, taking inflation back into double-digits (10% y/y in June).”
It added, “The committee was of view, as we are, that the uptick in inflation since May is only temporary and that the downtrend will resume in coming months. However, while the committee does not believe the second round effects of recent fuel price hikes pose a significant risk, it noted that, in order “to keep inflation within the target band”, it would require continued fiscal consolidation combined with tight monetary policy.
Absa Research again highlighted the growth in the banking sector operations between 2017 and 2018 but the apparent drop in confidence among businesses [private sector] and consumers.
“Credit to the private sector continues to improve steadily, with growth rising to 5.7% y/y in June from 0.8% in February. The Ghana Reference Rate has declined from 16.74% in May to 16.19% in June. Meanwhile, business and consumers confidence levels have eased somewhat, while non-performing loans to total loans remain high even as the percentage edged lower to 22.6% in June from 23.4% in April.”
The country is equally suffering from pressures from the international commodities market which impacted on the Balance of Trade figures, albeit a trade surplus.
“External balances, despite benefitting from higher oil revenues, are also reflecting the pressure of lower gold and cocoa revenues, with the cumulative trade surplus at USD1.1bn in June compared with USD1.13bn in June 2017.”
Absa hopeful of cedi’s turnaround
Meanwhile the research is anticipating a relatively stronger cedi despite impact from global developments which should warrant the reduction in the central bank’s policy rate figure.
“There are significant upside risks, including global energy prices, domestic weather conditions that could impact further on food prices, fiscal risks and US monetary and trade policies that may pressure the exchange rate.”
“However, we expect the cedi to show greater resilience into year-end, and perhaps strengthen to between 4.60-4.70/USD given several support pillars, including the USD1.3bn Cocobod loan, strong level of gross reserves of 3.9 months of imports and higher oil revenues.”
Credit: Absa Research